The Tax Cuts and Jobs Act, passed at the tail end of 2017, included a tax credit for employers that provide paid family and medical leave to their employees. After several months of uncertainty, the IRS has finally released some answers to their most frequently asked questions concerning the credit.
There are several criteria both employers and employees must meet to take advantage of this credit. The first and most important step is to ensure that you, as an employer, qualify for the tax credit in the first place. If you don’t meet the qualifications laid out by the TCJA there’s no point in pursuing the credit. Employers must have a written policy that provides, at minimum, two weeks of paid family and medical leave to full time employees. Qualifying employees who work part time aren’t excluded, their leave is just prorated. The TCJA also states that the compensation employees receive while on paid family and medical leave cannot be less than 50% of the wages the employee normally receives.
The second step is to evaluate your workforce and see which employees are eligible for paid family and medical leave. The employee must have been employed for one year or more. In addition, the employee must have received compensation under a certain amount for the preceding year. If you’re claiming a credit for paid leave in 2018, your employee must not have earned more than $72,000 in 2017.
In their FAQ, the IRS carefully defines what family and medical leave is for the purposes of this tax credit. It is leave for one or more of the following reasons:
- Birth of an employee’s child and to care for the child.
- Placement of a child with the employee for adoption or foster care.
- To care for 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 exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the armed forces.
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
Other kinds of paid leave an employer might already provide (paid vacation, personal leave, medical or sick leave, etc.) do not count towards the paid family and medical leave tax credit, nor does any leave paid for or required by state or local government.
Another answer provided by the IRS shed some light on the way an employer’s tax credit is calculated. The amount of credit you receive is a percentage of the wages paid to an employee during their leave. The minimum you can pay an employee during their qualifying leave is 50% of their normal wage, the corresponding minimum credit is 12.5%. For each percentage point an employee is paid above their normal wage, the credit increases by 0.25%. For instance, if an employee received 75% of their normal wage during their leave, the corresponding tax credit would be 18.75%. The maximum credit an employer can receive is 25%, which would correspond to the employee being paid 100% of their normal wage.
Tracking your employees’ leave and wages are vital factors in taking advantage of this tax credit. And for many business owners, tracking paid FMLA is an entirely new process. BASIC’s FMLA service can help you track paid FMLA through integration with our Absence Management service. When an employee reports an absence for the specific paid leave, the information can be reported to payroll, making tracking a breeze. Offering fair and consistent application of FMLA that meets all the legislative requirements is no easy task. Shift your FMLA responsibilities to BASIC and we’ll take care of it for you!