Paid Family Leave: Will Tax Credits Help Spread the Love?

April 28, 2018
The 2017 tax act introduced a federal tax credit for employers who provide paid family and medical leave to their employees.

Paid Family Medical Leave Snapshot

Only 15% of private-sector and state and local government workers had access to paid family and medical leave in 2017.

88% had access to unpaid leave.

Bureau of Labor Statistics' National Compensation

The 2017 tax act introduced a federal tax credit for employers who provide paid family and medical leave to their employees. So far, credits are only available for 2018 and 2019.

Pros and Cons for Employers

On the plus side, employers now have an incentive to launch paid family leave programs. Plus, they can show support for future legislation by getting onboard now. Then hope that credits will be expanded.

Cons include the two-year limit in current law. Another limit: employers can only claim this tax credit if they're not statutorily required to provide paid family leave. Employers must offer paid family leave as part of their own employee benefits. Also, the maximum tax credit is 25 percent. That may not be enough to help some employers offset the cost.

Section 45S: 3 Key Tax Credit Tips

1. The paid leave must be at least 50 % of the employee's wages and be offered for at least two weeks.

2. An employer must reduce its deduction for wages paid by the amount of any tax credit for paid FMLA leave.

3. Any wages taken into account in determining any other general business credit may not be used in determining this credit.

Get the facts straight from the IRS with these frequently asked questions and answers posted April 9, 2018.

Tax Credit Basics and Tips

On April 9, 2018, the IRS issued FAQs to provide some guidance on the tax credits. Here are some highlights:

Q. What is the employer credit for paid family and medical leave?

A: Eligible employers can claim a general business credit, based on a percentage of wages paid to employees on leave under the Family and Medical Leave Act.

Q: Who may claim the PFL credit?

A: Employers must have a written policy in place that meets certain requirements. They must provide:

  1. At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part time).
  2. The paid leave must be at least 50 percent of the wages normally paid to the employee.

Q: Which employees qualify?

A: Employers may be able to claim a tax credit in 2018 for wages paid to employees who:

  1. Have been employed by the employer for one year or more.
  2. Did not earn more than $72,000 in 2017.

Q: What is “family and medical leave” for purposes of the tax credit?

A: This is leave for one or more of the following reasons:

  1. Birth of an employee's child and to care for the child.
  2. Placement of a child with the employee for adoption or foster care.
  3. To care for the employee’s spouse, child, or parent who has a serious health condition.
  4. A serious health condition that makes the employee unable to perform the functions of his or her position.
  5. 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.
  6. To care for a service member who is the employee’s spouse, child, parent, or next of kin.

Q. Do any other types of leave qualify?

A. No. Paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one of the purposes listed above) isn't considered family and medical leave. Any leave paid by a state or local government or required by State or local law doesn't qualify either.

Q: How do employers calculate their tax credit?

A: The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5 percent. It increases by 0.25 percent for each percentage point that the amount paid to a qualifying employee exceeds 50 percent of the employee's wages. The maximum percentage is 25 percent. In certain cases, an additional limit may apply.

Q: How does the credit impact an employer’s deduction for wages paid?

A: An employer must reduce its deduction for wages paid by the amount of any tax credit for paid FMLA leave.

What's Different Compared to the FMLA?

The tax provision incorporates the definitions used in the FMLA. But it doesn't tie the tax credit to covered employers as defined by the FMLA.

The key is that the employer must have a separate, written policy or provision for paid family and medical leave. Current PTO policies may not qualify for the tax credit.

The written policy must provide at least two weeks of paid leave for family and medical leave at not less than 50 percent of wages for full-time employees. It must also provide a prorated amount for part-time employees. The two weeks of paid leave can't be provided as vacation, personal, medical or sick leave.

4 Steps Employers Can Take Now

1. Review or write your policy for paid FML. Make sure it complies with the law so you can benefit from the credit in 2018 and 2019. Employers who provide paid FML for employees who aren't covered by the FMLA must include a non-retaliation provision in their written policies. That means employees won't be penalized for taking paid leave.

2. Update your payroll and absence management systems. Ensure you're correctly tracking time and wages.

3. Review state and local leave legislation. Avoid surprises or conflicts with the leave-credit program.

4. Stay alert for additional guidance from the IRS. You can check back here for updates and resources. Or subscribe to the RSS feed for Relatively Speaking, our PFL-focused blog.

 

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