I want to make you aware of a valuable new tax credit made possible by the Tax Cuts and Jobs Act (TCJA). The credit is available to employers that provide paid family and medical leave to their employees. The amount of the credit is generally 12.5% of wages paid to an employee on leave. However, you must pay at least 50% of the wages normally paid to the employee while he or she is out on qualifying leave. The credit is increased by 0.25% (but not above 25%) for each percentage point the rate of pay is more than 50% of normal wages. So, if the leave payment rate is the same as the employee’s normal rate, a maximum credit of 25% will apply.
You must satisfy several requirements to take advantage of the credit. These include the following:
- You must have a written policy in place that provides at least two weeks of annual paid family and medical leave to qualifying full-time employees. (This is prorated for qualifying part-time employees.) Also, your policy must provide that qualifying employees on leave will be compensated at least 50% of their normal wages.
- The credit only covers wages paid to qualifying employees. These are individuals who have been employed for one year or more and didn’t have prior-year compensation exceeding a threshold amount. For 2018, this amount is $72,000. This means that employees who were paid more than $72,000 in 2017 aren’t qualifying employees in 2018.
- Wages must be paid for qualifying family and medical leave. This generally includes leave for the birth, adoption, or fostering of a child; care for a spouse, child, or parent with a serious health condition; an employee’s serious health condition; and qualifying needs of a spouse, child, or parent who is a covered veteran or member of the Armed Forces. Vacation leave, personal leave, and medical or sick leave (other than specifically defined as qualifying leave) don’t qualify for the credit.
- The maximum length of paid family and medical leave that can qualify for the credit is 12 weeks per employee, per tax year. Also, the total credit attributable to one employee can’t exceed the employee’s normal hourly rate for each hour (or fraction of an hour) of actual work performed multiplied by the number of hours (or fraction of an hour) family and medical leave is taken. The wages for an employee who isn’t paid an hourly wage rate are prorated to an hourly wage rate to determine the credit limit.
Assuming all of these requirements are met, the new employer credit for paid family and medical leave is a win-win situation. However, it’s only available for two years (unless extended by Congress). It’s important that you act now by reviewing your current leave policy and instituting a new policy if necessary.