IRS Guidance: Paid Family Leave Credit (article)
One of the provisions of the Tax Cuts and Jobs Act (TCJA) added a new employer tax credit for wages paid to qualifying employees during any period in which an employee is absent from work due to a family and medical leave event (see Employer Credit for Paid Family and Medical Leave, Benefit Beat, 1/16/18).
On April 9, 2018, the IRS issued its initial implementation guidance about this credit in the form of Frequently Asked Questions. While the IRS indicates that it will be issuing further guidance, following are some clarifications made by this set of FAQs.
An employer is eligible for a general business tax credit under Code Section 45S if it has a separate written policy in place that allows all qualifying full-time employees a minimum of two weeks of annual paid family and medical leave. The policy must also allow non-full time qualifying employees a comparable amount of leave on a pro rata basis. It is important to note that this credit is available to an employer without regard to whether it is subject to the federal Family and Medical Leave Act, as long as the employer maintains the written policy that meets the wage payment criteria.
For purposes of the credit, a qualifying employee is one who has been employed by the employer for at least one year, and whose compensation for the preceding year does not exceed 60% of the compensation threshold for highly compensated employees (less than $72,000 in 2017).
Amount of credit. For leave payments of 50% of normal wage payments, the credit amount is 12.5% of wages paid on leave. If the leave payment is more than 50% of normal wages, then the credit is raised by 0.25% for each one percent by which the rate is more than 50% of normal wages. Thus, if the leave payment rate is 100% of the normal rate, i.e., is equal to the normal rate, then the credit is raised to 25% of the on-leave payment rate.
The maximum leave allowed for any employee for any tax year is 12 weeks.
Leave paid by a state or local government is not taken into account. Paid leave such as vacation leave, personal leave, or other medical or sick leave provided by the employer is not to be considered leave for which the credit would be available
An employer is required to reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Further, any wages taken into account in determining any other general business credit cannot be used in determining this credit.
The FMLA tax credit is only available for a two-year period beginning January 1, 2018 and ends December 31, 2019.