What is this new credit?
With the implementation of the new Tax Cuts and Jobs Act, there comes a new federal income tax credit for employers who provide qualifying paid leave to their employees for family and medical purposes. Get ready; there are a lot of math and numbers in this one!
The qualifying employer can claim a credit of 12.5% of wages paid to qualifying employees who are on family and/or medical leave, as long as the payments are at least 50% of the employee’s normal wages. This credit increases by 0.25% for each 1% increase in paid leave over the 50% minimum. This would bring the maximum credit up to 25%, if the employer pays the employee 100% of their wages for paid leave. The employer is not required to make uniform leave payments for all employees but must meet the minimum requirements to take a credit for any particular employee.
In order for an employer to qualify for the credit, they must have a written policy in place before the leave is paid. For the first tax year, 2018, this policy may be retroactive. The written policy must meet the following tax code requirements:
- At least two weeks of annual paid family and medical leave must be provided for qualifying full-time employees. For qualifying part-time employees, the length of leave is prorated based on the number of hours the employee usually works during a week compared with the hours a full-time employee is expected to work. A part-time employee is defined as an individual who customarily works less than 30 hours per week.
- Qualifying employees on leave must be compensated at least 50% of their normal wages.
- An employer that is not covered by Title I of the Family and Medical Leave Act of 1993 must include in its written policy a non-retaliation statement explaining that it won’t interfere with, restrain or deny the exercise of (or the attempt to exercise) any right provided under the policy, and it won’t discharge or discriminate against any individual for opposing any practice prohibited by the policy.
In order for the employer to take the credit, the employee must have been employed for at least one year, and his/her compensation in the prior year cannot have exceeded 60% of a highly compensated employee’s. For 2017 and 2018, the IRS has set the highly compensated employee’s salary at $120,000, meaning the qualifying employee cannot have been paid more than $72,000.
In order to take the credit, the business reduces its wage and tax expense by the amount of the credit. Though it may sound like a downside, it is actually a great overall benefit in the end. The maximum length of paid leave that can be taken for the credit is 12 weeks per employee per tax year. Also, the total credit for each employee cannot exceed that employee’s normal hourly rate (prorated if not hourly employee) multiplied by the number of hours of leave taken.
Qualifying payments for family and medical leave is leave the qualified employee takes for any of the following reasons:
- The birth of the employee’s child, in order to take care of the child
- The employee taking in a child for adoption or foster care
- A serious health condition of the employee’s spouse, child or parent
- A serious health condition that makes the employee unable to perform the functions of his or her position
- Any qualifying exigency arising out of the fact that the employee’s spouse, child or parent is a member of the Armed Forces who is on covered active duty or has been notified of an impending call or an order to covered active duty
- A serous injury or illness of a covered service member who is the employee’s spouse, child, parent or next of kin
Note that vacation, personal and sick days (other than stated above) do not qualify for the credit. Also, if the leave is paid or required by state or local government or law, it is not eligible for the credit
There is a lot to digest when it comes to this credit, but it is a great benefit to those employers who bless their employees in this way during their times of need. If you would like more information concerning this credit or for any other tax questions you may have, feel free to reach out to us and we will be more than happy to help!
-Heritage Accounting and Tax Services