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Tax credit available for businesses providing qualifying family and medical leave

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On Sept. 24, 2018, the IRS provided guidance on a tax credit that was enacted by the 2017 Tax Cuts and Jobs Act (TCJA).  The new business credit is for eligible employers who provide paid family and medical leave to their employees for tax years 2018 and 2019.  Qualifying types of family and medical leave include the following:

  • Birth of an employee’s child and to care for the child
  • Placement of a child with the employee for adoption or foster care
  • 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

Eligible employers who set up qualifying paid family leave programs or amend existing programs will be eligible to claim the employer credit for paid family and medical leave.  A transitional rule for tax year 2018 is available to employers to retroactively establish a written policy that provides for paid family and medical leave.  To qualify under this transitional rule, the adopted or amended policy must be established on or before Dec. 31, 2018.

To qualify for the credit, the employer’s policy must provide a minimum of two weeks of paid leave with leave payments at least equal to 50 percent of wages normally paid.  An employer may not claim the credit for an employee on leave who earned more than $72,000 in 2017.

The amount of the credit can vary depending on the percentage of normal wages paid during the leave period.  The minimum credit amount is 12.5 percent of wages paid if 50 percent of normal wages are paid.  The credit amount can get up to a maximum 25 percent of the wages paid if 100 percent of normal wages are paid.  The credit is available based on wages paid for a leave period of up to 12 weeks per tax year.

As an example, if an employee is on leave for 4 weeks and has an annual salary of $52,000 and receives 50 percent of wages while on leave, the employer may claim a credit of $250 ($500 per week for four weeks times 12.5 percent).  If the employer were to provide 100 percent of wages while on leave, the available credit amount would be $1,000 ($1,000 per week for four weeks times 25 percent).

Additional components to an employer’s policy are required which are not highlighted in this article. For further discussion and if you require assistance creating or amending a policy, contact your account manager at 888-556-0123 or fill out our form.