New Short Term Tax Credit Available for Family and Medical Leave Benefits

Posted on 03.14.18

New Short Term Tax Credit Available for Family and Medical Leave Benefits

By Sean Rutherford, CPA | Tax Associate | Family, Executive & Entrepreneur Advisory Services Team

Overview:

Business owners will want to consider the new paid Family and Medical Leave (FMLA) federal tax credit created as a result of the recently passed Tax Cuts and Jobs Act (TCJA).

Under IRC section 45S(a), a provision now exists that allows businesses to receive a federal tax credit for wages paid to employees who take a leave of absence due to any FMLA issue. Most are aware that FMLA covers maternity leave or an employee’s illness, but you should also know that FMLA includes events such as adoption or family illness that requires an employee to take care of a sick family member.  The credit is between 12.5% and 25% of an employee’s wages paid during the leave.  The percentage of the credit depends on the percentage of wages paid to the employee while on FMLA.  Currently, the credit is only available for the 2018 and 2019 tax years.


Qualifications for the credit:

There are several hurdles that must be cleared before an employee’s wages will qualify for a credit.

  1. The employer must have a written policy that conforms to the requirements of IRC Section 45S(c).  Please note that many current business policies may not meet the requirements in their current form.  The policy must contain the following elements:
    • A qualifying employee who is not part-time (works more than 30 hours) must receive at least 2 weeks FMLA
    • A qualifying employee who is part-time (works less than 30 hours per week) must be provided a prorated amount of leave based on the amount the ratio of time a full-time employee receives
    • Employee mush have been employed for one year or more with the employer
    • Employees must receive at least 50% of their wages normally paid
    • In some cases, a provision assuring employees that they will not be penalized for using their leave. 
  2. The employee must have been employed at the current business for at least 1 year and may not be making more than $72,000 in 2017, adjusted for inflation in future years.
  3. The policy must be offered to both full-time and part-time employees
  4. Does not apply to paid leave mandated under state or local law.  This means that if a state or local government requires the paid leave, then it may not be taken into account for purposes of calculating the paid leave credit
  5. The length of time given as paid FMLA leave must be in a separate category and not included in vacation, personal, or sick leave.  For example, an employee must have at least 2 weeks specifically set aside for FMLA as opposed to having 2 weeks that may also be used for vacation or personal leave.

Note: The policy must cover all FMLA events.


How the credit is calculated:

The credit begins at 12.5% of an employee’s wages paid during their leave if the employer covers 50% of their normal wages.  The credit increases .25% for every additional 1% of wages that are covered, which gives a maximum credit of 25% for 100% of the employee’s wages.

Examples:

  1. Employee makes $50,000 annually.  Employee is out for 4 weeks.  Employer covers 50% of wages while on FMLA leave.  $25,000 * 12.5%  * 4/52 = $240 tax credit
  2. Employee makes $50,000 annually.  Employee is out for 4 weeks.  Employer covers 60% of wages while on FMLA leave.  $30,000 * (12.5% + (10 * .25)) * 4/52 = $346 tax credit

 

Still awaiting further guidance:

Some companies that currently offer paid FMLA leave contract with a short-term disability insurance provider to compensate the employee during their leave.  Under this arrangement, the company pays monthly premiums on behalf of the employee and the insurance provider compensates the employee upon their leave. With regards to qualifying for the tax credit, this raises the issue of who is actually paying the employee’s wages.  The IRS has not issued any regulations or guidance on this particular fact pattern, so there is currently no definitive answer as to whether or not the company would qualify for the credit. We are hoping for additional guidance later this year from the IRS to clarify this issue.

Conclusion:

While we are awaiting further guidance from the IRS regarding the paid-leave tax credit, each company should evaluate if this credit is something they could utilize to offer potentially expanded FMLA benefits to their employees.  Since the credit is not guaranteed past tax year 2019, companies should consider the cost of on-going compliance with the requirements of the credit should it not be renewed.

If you have any questions about the new law or need help in determining how the new law will affect your existing estate plan, Keiter is ready to help. Keiter Directory | Email | 804.747.0000

Additional Resources:

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.