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New Business Credit for Paid Family and Medical Leave

The 2017 Tax Cuts and Jobs Act created a business tax credit through Section 45S of the Internal Revenue Code for employers of all sizes that voluntarily offer paid family and medical leave to their employees. The credit is based on a percentage of the wages paid to a qualifying employee taking leave for up to 12 weeks per year, provided certain statutory requirements are met. The credit is available for tax years beginning after December 31, 2017, and before January 1, 2020.

Family and Medical Leave and Qualifying Employers

To qualify, employers must have a written policy granting at least two weeks annual paid family and medical leave to employees at 50% or more of the employee’s normal salary. The policy must grant leave to all qualifying employees who work full-time and be pro-rated for part-time employees. Vacation leave, personal leave, or other medical or sick leave does not meet the criteria and the credit does not apply if state or local laws mandate paid leave. The family and medical leave must include at least one of the circumstances described in certain subparagraphs of the 1993 Family and Medical Leave Act: the birth and care of the employee’s child, a child adoption, care for the employee’s spouse, child or parent with a serious health condition, the employee’s serious health condition, a qualified exigency resulting from a family member being on active duty in the armed forces, or care for a family member in the armed services. 

Qualifying Employees

A qualifying employee is someone who has worked for the employer for at least one year under the terms of the Fair Labor Standards Act and whose compensation is below a statutory-based income threshold for the prior year. For employers claiming the credit in 2018, the 2017 compensation limit is $72,000. 

Credit and Tax Reporting Concerns

The credit generated will range between 12.5% (50% of regular wages) to 25% (100% of regular wages) of the employee’s wages, depending upon the percentage of the employee’s regular salary paid during his or her leave. 

A business taxpayer may choose annually between either claiming the credit or a deduction for the related salary expense. Wages already applied toward any other general business credit may not be counted in determining this credit. The IRS has promised additional guidance on the credit, specifically when the written policy must be in place, how leave under this credit relates to an employer’s other paid leave, the impact of state and local laws, and how to determine an employee’s length of service. 

Employers should consider reviewing their current policies to determine if they qualify for the credit or need to make amendments to their policy.

Please note: This article first appeared in the June 2018 edition of the Jer-Z-Journal.

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Carolyn Dolci, CPA is a Tax Partner providing tax planning, compliance and advisory services with experience in corporate income tax, consolidated filings, partnerships, multi-state and local taxes and trusts.

Jeanne-Marie Waldman is a Senior Tax Manager with nearly 15 years of experience focusing on partnership and corporate taxation as well as state and local income tax compliance and consulting.