IRS Issues Form for Employers Seeking Paid Family Leave Credit (article)
One of the provisions of the Tax Cuts and Jobs Act (TCJA) added a new code section that provides an 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. For a summary of this credit, see our prior October, May and January Benefit Beat articles from 2018.
Briefly, 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.
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, indexed for 2017 and 2018). 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.
The credit is available to an employer without regard to whether it is subject to the federal Family and Medical Leave Act (FMLA), as long as the employer maintains the written policy that meets the wage payment criteria. The credit generally is effective only for wages paid in taxable years of the employer beginning after December 31, 2017, and before January 1, 2020.
Of interest to employers seeking the credit, the IRS released Form 8994 and related instructions for purposes of computing the amount of credit for paid family and medical leave for tax years beginning after 2017. The first part of the form requires attestation by the employer of the following:
- Whether the employer has a written policy providing for a minimum of 2 weeks of annual paid family and medical leave for qualifying employees to whom wages are paid and if so, does the policy provide paid leave of at least 50% of the wages normally paid to a qualifying employee;
- Whether the leave was provided to at least one qualifying employee during the tax year; and
- Whether the employer employed any employees not covered by the FMLA, and if so, whether the employer’s policy contained “non-interference” type language which basically states that the employer will not interfere, restrain, or deny the right provided under the leave policy, nor take any adverse employment action against individuals pursuing leave.
The second section of the form requires the total paid family and medical leave credit computed on wages paid during the tax year to qualifying employees while on leave. The instructions provide a worksheet to assist in this process. Special computation rules apply to partnerships and S-corporations.
Once the form is completed, the amount of the credit is reported in Part III of the Form 3800, General Business Credit. Partnerships and S corporations report this amount on their Schedule K.