Federal tax reform through the Tax Cuts and Jobs Act included a multitude of new tax benefits for businesses, including one for employers who offer paid family and medical leave.
The new Employer Credit for Paid Family and Medical Leave includes several caveats, including that it’s only available from Jan. 1, 2018 through Dec. 31, 2019. Despite the limited two-year window, the credit may be worth exploring for companies that offer paid FMLA leave.
- The tax credit is for new programs only, so it cannot be claimed for paid time off for programs the company already has in place.
- Employers must provide at least two weeks of leave and pay workers at least 50% of their regular earnings to qualify for the credit.
- The credit ranges from 12.5% to 25% of employees’ salaries while they are on FMLA leave, depending on how much you pay them. Employers that pay 50% of their employees’ salaries receive the 12.5% credit, ranging up to 25% for employers who pay 100% of their employees’ salaries.
- Qualifying employees must have worked at the company for at least a year and must have been paid no more than $72,000 in 2017.
- Part-time workers also must be offered paid leave. The paid leave for part-time employees can be determined on a prorated basis.
- The paid leave cannot be provided as vacation, personal, medical or sick leave.
- Small companies not required to offer FMLA leave also can qualify for the tax credit if they provide paid family and medical leave under a policy that ensures that they won’t interfere with, restrain or deny leave to qualified employees and they won’t fire or discriminate against employees who take paid family leave.
- Leave paid by a state or local government, and employers located in states or municipalities that mandate paid leave is ineligible for the credit.
Here’s an example of how the credit could work for a C Corporation:
- For an employee who makes $60,000 per year, and who you pay 100% of their wages while on leave, for a total of $10,000, the credit would be $2,500 at the 25% rate.
- The pre-tax cost would be $10,000; and the 25% credit would reduce it on an after-tax basis to $7,500, if your company’s tax liability exceeds the credit amount.
This example doesn’t take into consideration FICA taxes, but those are deductible anyway.
The new 20% Qualified Business Income Deduction for owners of pass-through businesses makes it more challenging to give an example of the credit for pass-through businesses, but they would have tax savings, as well.
The IRS has yet to issue any interpretive regulations about the credit, so a lot is still unknown, however the actual law should provide enough information for most businesses to consider if providing this benefit will be worthwhile. Also, many human resources professionals advise companies to start taking steps now to lay the groundwork to be in the position to take advantage of the credit.
Several human resources professionals interviewed by Society for Human Resource Management advise companies start redrafting FMLA and PTO policies to align with the tax credit provisions if they want to take advantage of it.
Contact us with any questions you have about the new Employer Credit for Paid Family and Medical Leave. We’ll update you as more guidance is issued.