In an effort to encourage employers to pay employees taking family and medical leave, the new tax bill establishes an employer tax credit for at least 25% of wages paid during such leave. The credit is available beginning in the 2018 tax year, but is scheduled to sunset after 2019. In order to take advantage of the credit, employers will need to establish a written policy that satisfies certain requirements.
The IRS has issued a set of Frequently Asked Questions (“FAQs”) on the new credit, which are available here. The FAQs are the first guidance on the tax credit, but IRS promises more is to come.
Employers that already provide pay during Family and Medical Leave Act (FMLA) leave should review their programs to determine if they will be eligible for the credit, and consider making adjustments as needed to qualify. Employers that do not currently pay employees while on FMLA leave might want to consider doing so to be able to take advantage of the credit for the 2018 and 2019 tax years.
In general, the FMLA requires employers to allow employees to take up to 12 weeks of leave each year for certain qualified medical and family reasons. Qualifying leave includes leave taken for pregnancy, adoption, foster care placement of a child, personal or family illness, or family military leave. Employees have the right to continue health benefits during FMLA leave, and enjoy other job-related protections. However, there is no requirement for employers to pay employees when taking FMLA leave.
Recently, several state and local governments have attempted to address the pay issue by enacting their own paid leave laws. Numerous states – including California, New Jersey, New York, and Rhode Island – currently have such mandatory paid leave benefits, which are funded with employee-paid payroll taxes and administered through the states’ disability programs.
Overview of New Tax Credit
The tax credit is not a mandate. Instead, it is a (temporary) tax incentive for employers to offer paid family and medical leave. Here’s how it works.
Employers will need to establish a policy (in writing) offering at least two weeks of paid family and medical leave to certain full-time employees, and a commensurate amount of pro-rated paid family and medical leave to part-time employees. The paid leave must be available to employees who, in the previous year, earned no more than 60% of the Fair Labor Standard Act’s highly compensated employee (HCE) threshold. According to the FAQs, this means for an employer claiming a credit for wages paid to an employee in 2018 the employee must not have earned more than $72,000 in 2017.
For purposes of the credit, “family and medical leave” is defined as leave for one or more of the following reasons:
- Birth of an employee’s child and to care for the child.
- Placement of a child with the employee for adoption or foster care.
- To care for the employee’s spouse, child, or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
According to the FAQs, if an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above), that paid leave is not considered family and medical leave. In addition, any leave paid by a State or local government or required by State or local law will not be taken into account in determining the amount of employer-provided paid family and medical leave.
The program must pay employees at least 50% of their normal wage during the family and medical leave period. However, employers that replace a higher percentage of wages will be able to claim a bigger credit. For example, employers that replace wages at a 50% rate will qualify for a credit equal to 12.5% of such wages. But for each point over 50% that the employer replaces wages, the credit will increase by a quarter of a point, up to a maximum credit of 25% for employers who pay employees 100% of pay during family and medical leave. The credit may not be claimed with respect to an employee for more than 12 weeks of paid leave during a taxable year.
The FAQs clarify the interaction of the family leave credit with the employer deduction for wages and salaries. According to the FAQs, “an employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Also, any wages taken into account in determining any other general business credit may not be used in determining this credit.”
More Guidance to Come
According to the FAQs, the IRS will issue more guidance on a variety of issues and questions relating to the new credit. Future guidance will address, for example, “how to determine whether an employee has been employed for ‘one year or more,’ the impact of State and local leave requirements, and whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.”