The new tax reform law, commonly referred to as the Tax Cuts and Jobs Act, creates a tax credit for eligible employers that voluntarily offer up to 12 weeks of paid family and medical leave annually to qualifying employees. The new credit is available for an employer’s tax year that begins in 2018 or 2019. It’s part of the general business credit reflected on Form 3800 that reduces a taxpayer’s income tax liability.
To be eligible for the credit, an employer must have a written policy in place that allows qualifying full-time employees at least two weeks of paid family and medical leave a year. For part-time employees, the minimum leave amount is prorated based on the hours expected to be worked compared to full-time employees.
The employer’s policy must pay an employee on leave at least 50% of their normal wages.
For purposes of the credit, family and medical leave is leave provided for the following:
- The birth and care of a new baby or the adoption of a child
- When the employee is unable to perform his or her job because of a serious health condition
- Care of an employee’s spouse, child, or parent with a serious health condition
- Care of an injured member of the military
- A qualifying exigency when a family member is on active duty in the military
The credit doesn’t apply to leave that’s mandated by state or local law. It also doesn’t apply to paid vacation leave, personal leave, or other family or medical leave not included above.
Qualifying employees are those who have been employed by the employer for at least one year and who had compensation in the preceding year not above 60% of the compensation threshold for highly compensated employees.
For 2018, the compensation threshold for highly compensated employees—an inflation-adjusted number set by Treasury—is $120,000, which means an eligible employee’s compensation would need to be below $72,000 for 2017.
Computing the Credit
For leave payments of exactly 50% of normal wage payments, the credit amount is 12.5% of the wages paid to the employee during his or her leave.
If the amount paid while on leave is more than 50% of normal wages, then the credit is raised by 0.25% for each 1% by which the payment rate is more than 50% of normal wages. For instance, if the payment rate while on leave is 70% of normal wages, then the credit is raised to 17.5% of wages paid during the leave. For any employee, the amount of leave considered for purposes of the credit can’t exceed 12 weeks.
We’re Here to Help
This new credit can benefit eligible employers with qualifying employees; however, it’s currently only available for the 2018 and 2019 tax years, so employers should consider the benefits of the credit this year. For more information on whether you’re eligible to claim the new paid family and medical leave credit, contact your Moss Adams professional. You can also visit our dedicated tax reform page to learn more.