The Tax Cuts and Jobs Act gave employers an unexpected perk when it added an employer tax credit for paid leave under the Family and Medical Leave Act (FMLA). Under the new Section 45S of the Internal Revenue Code, employers may claim a tax credit for a portion of the wages they voluntarily pay to qualifying employees for up to 12 weeks.
The credit ranges from 12.5 percent to 25 percent of wages paid to qualified employees, depending on the percentage of wages employees receive. Fifty percent of an employee’s wages must be paid for the employer to receive the 12.5 percent credit. The credit increases incrementally to 25 percent if the full amount of employee wages are paid.
There are some requirements, of course, to claim the credit. An employer must:
- Have a written policy in place;
- Pay the wages between January 1, 2018, and December 31, 2019; and
- Provide the qualified employee with at least two weeks of leave.
A qualifying employee is one who has been employed for more than one year, and whose income in the previous year did not exceed 60% of the income threshold used to determine highly-compensated employees. For 2018, this would be any employee who earned $72,000 or less in 2017. Also, the credit does not apply to employees who reside in areas where paid leave is mandated by state or local law.
Qualified reasons for leave under Section 45S include:
- Birth of an employee’s child and time away to care for the child.
- 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 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.
- Care for a service member who is the employee’s spouse, child, parent or next of kin.
When claiming the credit, an employer must reduce its wages deduction by the amount of the credit. For example, assume an employer pays three months of an employee’s full wages, which amounts to $15,000, after the birth of a child. Since the employer is paying the full wages, it can take the full 25 percent credit. Therefore, the wages deduction on the employer’s tax return would need to be reduced by 25 percent, or $3,750 in this case. Any amounts paid for vacation leave, personal leave or medical sick leave other than described above do not qualify for the credit.
We are still awaiting certain clarifications from the IRS, such as when the written policy must be in place to qualify for the credit. Other uncertainties include how to determine whether an employee has been employed for one year or more, the impact state and local requirements may have on claiming the credit and how to treat members of a controlled group of corporations.
For now, if you are an employer hoping to take advantage of this new credit, begin by working with your legal and accounting advisors to review and potentially modify your existing written policy to ensure it aligns with the credit requirements.
Please contact a member of your service team, or contact Josh Messina, head of our Tax Credits & Incentives Group, at firstname.lastname@example.org, or Alex Schneider at email@example.com.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.