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Benefits of the New Paid Family and Medical Leave Credit

Benefits of the New Paid Family and Medical Leave Credit

The recently enacted Tax Cuts and Jobs Act (TCJA) includes a number of changes to the current business deductions and credits laws. One of these changes introduces a new component tax credit for paid family and medical leave (IRC Sec. 45S), i.e. the paid family and medical leave credit, which is available to eligible employers for wages paid to qualifying employees on family and medical leave.
The paid family and medical leave credit is available as long as the amount paid to employees on leave is at least 50% of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019. That is, under the Tax Cuts and Jobs Act, the new credit is temporary and won’t be available for employer tax years beginning in 2020 or later unless Congress extends it further.

The paid family and medical leave credit amount is 12.5% of wages paid for leave payments of at least 50% of normal wage payments. If the leave payment is more than 50% of normal wages, then the credit is raised by .25% for each 1% by which the rate is more than 50% of normal wages. So, if the leave payment rate is 100% of the normal rate, i.e. the employee receives full pay while on leave, then the credit is raised to 25% of the on leave payment rate (examples below). For purposes of the credit, the maximum leave allowed for any employee for any tax year is 12 weeks.

Eligible employer

Eligible employers are those with a written policy in place allowing (1) qualifying full -time employees at least two weeks of paid family and medical leave a year, and (2) less than full-time employees a pro-rated amount of leave. The policy requires that the rate of payment under the program is not less than 50% of the wages normally paid to that employee for services performed for the employer. Any leave which is paid by a State or local government or required by State or local law shall not be taken into account in determining the amount of paid family and medical leave provided by the employer.

Qualifying Employee

Qualifying employees are those who (1) have been employed by the employer for one year or more, and (2) in the preceding year, had compensation not above 60% of the compensation threshold for highly compensated employees under the qualified retirement plan rules (for 2018, the figure is $72,000).

Family and Medical Leave Defined

For purposes of the credit, “family and medical leave” means leave for any one or more of the following purposes described under section 102(a)(1), subparagraphs (A) through (E), or section 102(a)(3) of the Family and Medical Leave Act of 1993 (FMLA):

  • because of the birth of a son or daughter of the employee and to care for that son or daughter.
  • because of the placement of a son or daughter with the employee for adoption or foster care.
  • to care for the spouse, or a son, daughter, or parent, of the employee, if that spouse, son, daughter, or parent has a serious health condition.
  • because of a serious health condition that makes the employee unable to perform the functions of the position of that employee.
  • because of any qualifying exigency (as determined by the Secretary of Labor) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on covered active duty (or has been notified of an impending call or order to covered active duty) in the Armed Forces.

FMLA section 102(a)(3) provides for leave for an eligible employee who is the spouse, son, daughter, parent, or next of kin of a covered veteran or member of the Armed Forces Paid leave provided as vacation leave, personal leave, or other medical or sick leave is not considered family and medical leave.

Special Rules

  • The credit can be used to reduce a taxpayer’s alternative minimum tax.
  • The credit allowed for any employee for any tax year can’t exceed an amount equal to the product of the normal hourly wage rate of that employee for each hour (or fraction thereof) of actual services performed for the employer and the number of hours (or fraction thereof) for which family and medical leave is taken.
  • All persons treated as a single employer under Code Sec. 52(a) (members of the same controlled group of corporations) and Code Sec. 52(b) (trades or businesses, whether or not incorporated, which are under common control) are treated as a single taxpayer for purposes of the credit.
  • A taxpayer can’t take both a credit and a deduction for amounts for which the paid family and medical leave credit is claimed. Thus, a taxpayer can’t deduct that portion of the wages or salaries paid or incurred for the tax year which is equal to the sum of the credits determined for the tax year.

Examples

  1. Employer pays $10,000 of wages to qualifying employees during a period in which those employees are on family and medical leave. This amount is 50% of the wages normally paid to the employees for services rendered to the employer. Employer can claim a paid family and medical leave credit of 12.5% of $10,000, or $1,250.
  2. Employer pays $12,000 of wages to qualifying employees during a period in which those employees are on family and medical leave. This amount is 60% of the wages normally paid to the employees for services rendered to the employer. The 60% rate of payment exceeds 50% by 10%. As the applicable percentage of 12.5% used to determine the credit is increased (but not above 25%) by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50%, Employer’s credit is increased by 10 × 0.25%, or 2.5%. Employer can thus can claim a paid family and medical leave credit of 15% (12.5% plus 2.5%) of $12,000, or $1,800.

Paid Family and Medical Leave Credit Conclusion

Now is a good time for employers to ensure they have the proper policies in place to benefit from this new credit. For more details on the paid family and medical leave credit, contact your Withum Tax Advisor or fill out the form below, and we’ll be in touch with you.

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