Question: What is the new Family and Medical Leave tax credit and how does it benefit my business?
Answer: The 2017 Tax Cuts and Jobs Act recently introduced a new credit for employers who provide paid family and medical leave to their employees. Eligible employers can claim a general business credit equal to 12.5% to 25% of the wages paid to qualifying employees on paid leave. The credit is available for periods starting January 1, 2018 and is set to expire on December 31, 2019.
In order to qualify for this credit, a written policy of at least two weeks of paid leave to all qualifying employees at the rate of at least 50% of their normal wages must be in place. The rate of credit increases .25 percentage points for every one percent increase in wages over the 50% mark, but cannot exceed 25%. For example, if the rate of wage payment is 60%, then the credit rate will be 15% (60%-50%=10*.25=2.5%, 12.5%+2.5%=15%).
Wages for the purpose of this credit are only wages paid (not accrued) during the year and this credit is allowed only for employees whose salary was less than $72,000 in the preceding year, which is 60% of the threshold for highly compensated employees. The threshold is the same for 2017 and 2018.
Leave for the purpose of this credit means any leave that an employee might take under the FMLA provisions, which includes common situations such as birth of an employee’s child, to care for an employee’s spouse, child or parent who has serious health condition and other leave as allowed under FMLA. It doesn’t apply to leave that’s mandated by state or local law. There could be other restrictions as well.
Although it will take a little while to have the regulations and guidelines streamlined for this tax credit, it would be a good idea to start brainstorming how your business could take advantage of this new provision in the future by reconsidering and redrafting the paid time off policies.
If you have questions about the new Family and Medical Leave tax credit, please contact Swati Jain, CPA, Senior Accountant at Wegner CPAs.
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About the Author
Swati Jain, CPA is a Senior Accountant at Wegner CPAs. Swati is experienced in individual and business tax planning and preparation, as well as international taxation issues.
