Tax Reform Offers New Employer Credit for Paid Family and Medical Leave

The Tax Cuts and Jobs Act introduced a new general business credit for employers that pay employee wages during time away from work under the Family and Medical Leave Act (FMLA). The paid family and medical leave credit can be used to reduce a taxpayer’s alternative minimum tax. However, the new credit will not apply to wages paid in tax years beginning after Dec. 31, 2019.

In order to claim the credit, an employer must first have a qualifying plan. The plan must be written and include the following provisions:

• qualified full-time employees must have at least two weeks of paid family and medical leave per year (up to 12 weeks is allowed for credit purposes),
• part-time employees must receive a pro-rated share of paid leave, and
• employees must be paid at least 50 percent of normal wages.

Qualified employees are those employees that:

• have been employed by the employer for at least one year, and
• received less than $72,000 of compensation in the prior year.

Family and medical leave means leave for the following purposes:

• birth of a child and to care for such child,
• placement of a child with the employee for adoption or foster care,
• to care for certain family members (spouse, child, parent) that have a serious health condition,
• a serious health condition of the employee that makes the employee unable to perform the functions of their position, or
• any qualifying exigency (situation calling for immediate attention) arising from a family member on covered active duty in the Armed Forces.

The base amount of the credit is 12.5 percent of wages paid during the FMLA leave. For each additional percentage of normal wages paid, the credit percentage is increased by 0.25 percent. For example, if 100 percent of normal wages are paid, the credit percentage is 25 percent. A taxpayer cannot deduct a portion of the wages equal to the amount of the credit claimed.

The credit is not allowed for paid leave that is vacation leave, personal leave, or medical or sick leave (unless it qualifies under the FMLA). In addition, any leave which is paid by a state or local government or required by state or local law is not taken into account in determining the amount of paid leave provided by the employer. Related companies must be aggregated to determine whether the employer has a qualifying plan.

Example 1:

Employer pays $10,000 of wages to qualifying employees during a period in which those employees are on family and medical leave. This amount is 50 percent of the wages normally paid to the employees for services rendered to the employer. Employer can claim a paid family and medical leave credit of 12.5 percent of $10,000, or $1,250.

Example 2:              

Employer pays $12,000 of wages to qualifying employees during a period in which those employees are on family and medical leave. This amount is 60 percent of the wages normally paid to the employees for services rendered to the employer. The 60 percent rate of payment exceeds 50 percent by 10 percent. As the applicable percentage of 12.5 percent used to determine the credit is increased by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent, Employer’s credit is increased by 10 × 0.25 percent, or 2.5 percent. Employer can claim a paid family and medical leave credit of 15 percent (12.5 percent plus 2.5 percent) of $12,000, or $1,800.