For some, it’s all about the math. Maybe you’ve considered offering your employees a paid family and medical leave benefit, but just couldn’t afford the additional expense.
Although the Family and Medical Leave Act has required larger employers to provide up to 12 weeks of protected leave for many years, it does not require paid leave.
If you’ve held back on providing optional paid leave for financial reasons, a federal general business tax credit created by the Tax Cuts and Jobs Act may fundamentally alter the equation.
The family and medical leave tax credit is intended to incentivize employers to offer their employees paid leave for medical and family matters, while at the same time reducing the financial impact on the employers’ businesses.
Depending on the specifics of your payment policy for family and medical leave, you may qualify for a tax credit of between 12.5 percent and 25 percent of qualifying wages paid during 2018 and 2019.
Let’s start with a few relevant definitions.
A qualifying employee is a person who has been employed by you for at least a year. You cannot require the employee to have worked at least a specified number of hours during that year to qualify for paid leave. Similarly, you cannot require that the person have been employed for 12 consecutive months.
For the previous year, the employee cannot have been paid more than a specified amount. For 2018, that amount is $72,000 in 2017 wages. This requirement includes both full-time and part-time employees. An employee who typically works at least 30 hours per week is considered full-time.
The determination as to whether an employee qualifies under these rules is determined as of the date the leave is taken.
For purposes of the family and medical leave tax credit, an employer is determined based on common law rules. Essentially, an employer is anyone for whom someone performs services.
To be eligible for the credit, the employer must have a written policy that satisfies all of the requirements described in Employer Policy Requirements below.
Qualifying (Normal) Wages
Wages that qualify for the credit are generally the same as those for federal unemployment taxes (FUTA), however, the FUTA wage limit is ignored.
Wages paid for other types of leave (e.g. vacation, sick) do not qualify. Wages used for any other general business credit do not qualify. Likewise, you cannot consider any leave that is paid or mandated by a state or local government when calculating the family and medical leave you’ve actually paid.
Only paid leave that is taken for the purpose of family and medical leave qualifies. Leave that is taken for vacation, personal time or sick leave, for example, is not eligible for the credit.
Paid family or medical leave refers to leave provided for any of the following:
the birth of a child
the adoption or foster care of a child
to care for a spouse, child or parent with a serious health condition
to care for a service member who is the employee’s spouse, child, parent or next of kin
a qualifying event due to an employee’s spouse, child or parent being on active duty, or being called to active duty, in the Armed Forces
a serious health condition that renders the employee unable to perform the necessary functions of the job
The family and medical leave tax credit is effective beginning on September 28, 2018 for all wages paid during calendar 2018 and 2019. It currently expires for wages paid after December 31, 2019.
Employer Policy Requirements
As an employer, you must have your written policy governing family and medical leave in place before you can claim the credit.
With one exception, your paid leave policy must be in place before your employee takes leave eligible for the credit. However, as a transitional rule for 2018, you have until December 31, 2018 to retroactively develop or amend your policy, so that the policy is considered to have been in place on the retroactive effective date.
You may also retroactively make leave payments to employees under the new or amended policy during 2018.
Your family and medical leave policy must satisfy all of the following requirements:
All qualifying employees must be covered.
Employers must provide each full-time qualifying employee with at least two weeks of annual paid family and medical leave — prorated for part-time qualifying employees.
While on leave, the qualifying employee must be paid at least 50 percent of his or her normal wages.
For eligible employees not covered by Title 1 of the Family and Medical Leave Act — perhaps they work less than 1,250 hours per year — the policy must include language that provides non-interference protections. For example, per the IRS: [Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.
There is no requirement that you notify your employees of your policy. But if you make an announcement, it must be made to all eligible employees.
Calculating the Credit
The amount of the tax credit is calculated based on a percentage of the wages you pay your employees while they are on paid family or medical leave. It is limited to 12 weeks per employee, per year.
As previously noted, wages paid for other types of leave do not qualify and the credit only applies to wages paid during calendar years 2018 and 2019.
If the leave you pay is equal to 50 percent of the employee’s normal wages, your family and medical leave tax credit is the minimum: 12.5 percent of the leave paid. Pay less than 50 percent and you don’t qualify for the credit. Pay more than 50 percent and your credit increases by 0.25 percent for each percentage point your leave exceeds 50 percent. The maximum credit is 25 percent.
If you claim a family and medical leave tax credit, you must decrease your wage deduction by the amount of the credit.
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