Family and Medical Leave: Will Your Program Qualify for a Federal Tax Break?
The Tax Cuts and Jobs Act (TCJA) introduces a tax credit for certain employers that provide family and medical leave programs. There are rules and requirements that must be satisfied to take advantage.
For wages paid in 2018 and 2019, you may be able to claim a business tax credit for amounts paid to “qualifying employees” who take family and medical leave. The credit expires after December 31, 2019. This is a very short timeframe to be able to take advantage of the credit.
The following requirements must be met:
- You must have a written policy in place that provides at least two weeks of paid family and medical leave annually.
- Paid leave must be offered to all qualifying full-time employees. It may be prorated for part-time employees.
- Paid leave cannot be less than 50% of the wages normally paid to the employee.
Leave paid by a state or local government or required by state or local law does not qualify for this credit.
Calculating the credit
The credit equals a percentage of wages paid to a qualifying employee while he or she is on leave for up to 12 weeks per tax year. The minimum percentage is 12.5%. It increases by 0.25% for each percentage point by which the amount paid to an employee exceeds 50% of his or her wages.
The maximum credit is 25% of wages paid to an employee on leave. The credit is reported on new tax Form 8994 and flows to Form 3800 as general business credit.
The necessary formulas for computing the credit are as follows:
- Applicable % = (12.5% + (.25% * (rate of pay-50%); and
- Family and Medical Leave (FML) credit = Applicable % * wages paid on leave
For example, assume facts are met to be an eligible employer and qualifying employee. Five weeks of paid family and medical leave are issued at a rate of 80% of what is normally paid. The employee gets $1,000 per week. The applicable percentage equals 20% (12.5% + (.25% * (80% – 50%). The FML credit equals $800 (20% * ($1,000 *5 weeks*80%). Other limits might apply in certain circumstances.
It is important to note that your deduction for wages must be reduced by the amount of the credit. Additionally, wages used to determine other business tax credits cannot be used to determine the family and medical leave credit.
Who and what qualifies
A qualifying employee is someone your company has employed for at least a year and whose compensation for the preceding year didn’t exceed a certain amount. For the employer to claim a credit for 2018, the employee cannot have earned more than $72,000 in 2017. An evaluation of the workforce will need to be performed to determine eligibility.
For the purposes of the credit, family and medical leave includes leave taken 1) for the birth of a child and to care for the child, 2) to place a child with the employee for adoption or foster care, 3) to care for a spouse, child or parent who has a serious health condition, or 4) due to a serious health condition that makes the employee unable to perform his or her job.
It also covers certain needs that arise due to an employee’s spouse, child or parent being on active military duty or the need to care for a family member who is a qualifying service member.
Qualifying and quantifying
Contact your trusted ORBA advisor to determine whether your program qualifies for this credit and the potential tax savings for 2018 and 2019.
For more information, contact Adam Guldan at 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.