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 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 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).
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):
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.
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.