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A new federal tax credit is available for 2018 through the end of 2019 for eligible employers providing their employees paid family and medical leave. The new tax credit is part of the Tax Cuts and Jobs Act that has employers hoping the first version of the business tax credit will become permanent as more employers switch to paid time off (PTO) compensation as an employee benefit.
Full guidance regarding the credit has not yet been released, but a general review indicates eligible employers may claim a tax credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA). To receive the credit, employers must provide at least two weeks of FMLA leave and pay workers at least 50 percent of their regular earnings. Both full-time and part-time workers, if employed for at least a year, must be offered paid leave for an employer to be able to claim the tax credit. Part-time employee qualifying for paid leave must be determined on a prorated basis.
The credit will range from 12.5% to 25% of the cost of each hour of paid leave, depending on how much of a worker’s regular earnings the benefit replaces. The government will cover 12.5% of the benefit’s costs if workers receive half of their regular earnings, increasing to 25% if workers receive their entire regular earnings while on leave. So if the leave payment rate is 100% of the normal rate, then the credit is raised to 25% of the on-leave payment rate. The maximum leave allowed for any employee during any tax year is 12 weeks.
Employers may only apply the credit toward workers they have employed for at least a year, and who were paid no more than $72,000 for 2017. The wage ceiling will be inflation adjusted going forward.
As they await more specific guidance, Society for Human Resource (SHRM) members debate whether most company PTO policies qualify for the tax credit, as many do not offer paid ‘family and medical leave’ as a separate provision as the new tax law requires. Instead, they say most companies designate their PTO benefits for vacation, personal, medical or sick leave; none of which are considered as ‘family and medical leave’ under FMLA. The human resource professionals say that employers should review their paid-time-off policies to assure they are drafted to qualify them for the tax credit.
SHRM also points out the credit does not apply to paid leave mandated under state or local law. Further, they suggest that policies may need to include nonretaliation provisions to assure employees won’t be penalized for taking the paid leave.
For more on the effect of the new tax credit on your business, please contact one of our business tax planning experts at McRuer CPAs online or call 816.741.7882.
