A New Tax Credit Based on an Old Law

Background

Since the Family and Medical Leave Act (FMLA) was enacted in 1993, employers have been required to provide employees with temporary leave, up to 12 weeks, for either family or medical reasons. There are some limitations, including that the employer must have at least 50 employees, and the reasons for the leave must relate to pregnancy, adoption, foster care, personal or family illness, or military leave. he Act provides for job security during the leave period, during which the employer is not required to pay the employee.

Fast forward to the Tax Cuts and Jobs Act (TCJA) of 2017. A provision within the new law includes a tax credit for employers that offer Family and Medical Leave. The credit incentivizes employers to offer paid leave to their employees. What makes this credit even more valuable is that employers with fewer than 50 employees, who are not subject to FMLA, can also benefit.

How It Works

In order to be eligible for the tax credit, employers must have a written policy in place that offers employees at least two weeks of paid or family-and-medical leave, including at least 50% of normal wages.

If a company does not have a written policy, one may be created in order for the company to become eligible for the credit. However, the credit will only be available for an employee’s paid leave that takes place after the written policy is in place.

The credit is calculated by first taking 12.5% of the initial 50% of leave wages paid. For every percentage point of paid wages above 50%, an additional .25% credit accrues. Thus, for example, if an employer pays 75% of an employee’s wages, the tax credit will be 18.75% of the wages paid. If the employer pays 100% of the wages, the credit will be 25%.

A limitation to the credit occurs if the employer’s written policy includes paid leave for a reason not included in the Act. For example, if in addition to allowing family and medical paid leave, the employer also allows paid leave for minor illnesses, vacation, and personal reasons, then the employer is not eligible for the credit.

Another limitation occurs when the state or local government subsidizes part of the paid leave. However, it is important to note that the credit is still available as long as the employer pays at least 50% of the wages. Therefore, if the state government requires employers to have paid leave and the state assists by paying 50%, as long as the employer also pays 50%, the employer is still eligible for the credit. Businesses taking advantage of the tax credit are subject to limitations on tax deductions related to wages that are utilized to compute the credit.

This new tax incentive has created a great way for businesses to benefit from a service they are already providing, and as mentioned earlier, even companies that are not yet offering paid leave can benefit as well, as long as a written policy is created. Presently, this is a temporary credit available until December 31, 2019. However, in the meantime, it does offer an attractive tax incentive for businesses and should not be overlooked.