Tax Credits for Paying Family and Medical Leave
The Tax Cut and Jobs Act (“TCJA”) provides a valuable benefit in the form of a business tax credit if you pay employees for family and medical leave for 2018 and 2019. If you have a written policy offering all qualifying employees at least two weeks a year of paid family and medical leave that is at least 50% of the individual’s normal wages, you can claim a credit of 12.5% of those wages. Your available credit increases to 25% if 100% of employee’s wages are paid. Part-time employees (individuals working less than 30 hours a week) need to be offered a pro-rata benefit, based on expected weekly hours. For 2018, a qualifying employee is one who was employed for at least one year and made no more than $72,000 in 2017. This amount may increase slightly for 2019.
Family and medical leave is leave for one or more of the following reasons:
- Birth of an employee’s child and to care for the newborn.
- Placement of a child with the employee for adoption or foster care.
- Care of the employee’s spouse, child, or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying event due to an employee’s spouse, child, or parent being on covered active duty – or being called to duty – in the Armed Forces.
- Care of a service member who is the employee’s spouse, child, parent or next of kin.
Unfortunately, vacation, personal leave, and medical or sick pay (other than for the purposes above) do not qualify as family and medical leave, and are not eligible for the credit. In addition, leave required by state or local law is not eligible for the credit. Tax-exempt employers cannot claim the credit as they are not subject to federal unemployment taxes. However, paid leave under an insured or self-insured short-term disability program can qualify for the credit.
Even if an individual is not covered by Title I of the Family and Medical Leave Act, the credit is available as long as the leave policy includes “non-interference” protections to ensure the employer will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under the policy, and will not discharge, or in any other way discriminate against, any individual for opposing any practice prohibited by the policy. The IRS provides model language for this.
The IRS recently released Notice 2018-71 clarifying some of the issues employers are facing as they calculate the credit. The guidance provides a transition rule for adopting a written policy. For 2018, if the policy is adopted by December 31, 2018, it will be considered in place on the effective date as long as the employer retroactively applies the policy from the effective date onwards, and makes any retroactive leave payments by the last day of the taxable year.
The guidance also allows an employer to use reasonable methods for determining whether an individual has been employed for a year, but states requiring 12 consecutive months of employment is not reasonable. For example, if an employee has worked for 12 of the last 18 months, the individual will be considered to have been employed for a year, even if the individual only returned to work 3 months ago. In addition, imposing a minimum number of hours to be provided family and medical leave would not be reasonable.
Wages used to determine the required family and medical leave payment are only normal wages, and do not include discretionary bonuses or overtime other than that which is regularly scheduled. If an individual is paid other than on a salaried or hourly basis, the Fair Labor Standards Act regular rate of pay rules are used to determine normal wages. Any reasonable method can be used to determine a normal hourly rate for individuals not paid an hourly wage.
An employer’s policy can have different percentages of pay paid for different employees and different family and medical leave purposes. The policy can also have different periods for which family and medical leave are paid for different individuals and different purposes. However, it there are differences within the policy, the minimum paid leave must be paid for each family and medical leave purpose for which the credit is claimed.
The credit is available for family and medical leave payments to an employer’s common law employees, including those paid by a third party (e.g., an insurance company, a professional employer organization (“PEO”) and a certified PEO). The individual must be a qualifying employee when the payments are made for the employer to be able to claim a credit on the amounts paid. Thus, payments to an individual who has not been employed for a year are not eligible for the credit, even if that individual remains employed and satisfies the one-year requirement after the leave period.
If you pay family and medical leave, you will want to review your policies to determine if the payments can qualify for the credit. If not, you should determine any changes needed to conform the policy to the rules retroactively and the associated costs to decide whether to become eligible for the credit. Even though the maximum credit is 25% of wages, a policy that almost conforms to the rules may generate more credit than the additional cost of payments. In making these calculations, it is important to remember that the wages for which the credit are claimed are nondeductible, consistent with most other wage credits.
If you would like assistance in navigating family and medical leave tax credits, please reach out to Deb Walker or one of our Cherry Bekaert professionals. We will be happy to assist you in your specific needs to help you reach the best solution for your business.