A new Employer credit for Paid Family and Medical Leave, that has been enacted by the Tax Cuts and Job Act (TCJA) is imposed to help businesses reduce their taxes while employees are on paid leave from their job duties due to specified reasons. Employers are eligible to claim this credit based on the wages paid to their qualifying employees while they are on family and medical leave.
Before the enactment of this new tax credit most businesses with at least 50 employees and most public-sector employers were subject to the Family and Medical Leave Act (FMLA) of 1993, which required them to provide employees on specified leave up to 12 weeks where they would still receive their health benefits. The FMLA didn’t require employers to pay their employees any wages or salary during their time of leave, although some employers still chose to do so. Under FMLA, employers are required under those statutes to return the employee back to the same position or an equivalent position that they help prior to taking leave. This new tax credit is available to eligible employers that are both subject and exempt to the FMLA.
All general business credits being claimed by employers combined, including the family medical leave credit, can not exceed the taxpayer’s net income tax over the greater minimum tax, or 25 percent of the taxpayer’s net regular tax liability that exceeds $25,000. However, if the sum of the general business credits does exceed $25,000, the excess amount can be carried back one year and carried forward 20 years.
When excess general business credits are carried back or forward, they are subject to certain ordering rules which provides that the credits must be used in the order in which they are listed. It’s advised to consult with you local CPA so that they can take into consideration the excess general business credits and how to properly claim the credit.
Business owners can claim this credit by filing the Employer Credit for Paid Family and Medical Leave (Form 8994), and the General Business Credit (Form 3800) with their tax return.
In order for an employer to claim this credit, they must have a written policy that meets specific requirements:
- The employer must provide at least two weeks of paid family and medical leave annually to all qualifying, full time employees. If the employees are part time, the paid time can be prorated.
- The paid leave paid by the employer must be 50 percent or more of the wages normally paid to the employee
What makes a qualifying employee for this new tax credit?
- The employee must be employed for a minimum of one year.
- For the previous year, the employee’s compensation could not exceed a certain amount. For 2018, the employee must not have earned more than $72,000 in 2017.
What is considered “family and medical leave” in order to be eligible for this credit?
- The birth and care of an employee’s child.
- An employee is placed with a child through adoption or foster care.
- The employee is responsible for caring for a spouse, child or parent with a serious health condition.
- Any qualifying even due to an employee’s spouse, child or parent being on covered active duty or being called to duty in the Armed Forces?
- The employee is responsible for caring for a spouse, child, parent, or next of kin who is a service member.
How to calculate the credit
The family and medical leave credit is equivalent to an applicable percentage of the amount of wages paid to the employee during a period up to 12 weeks while they are on leave. The wages paid by the employer while the employee is on leave must exceed up to 50 percent of their wages.
The applicable percentage of the credit is 12.5 percent of wages that are paid to the employee on leave during the tax year. An increase of 0.25 percentage is gained for every percentage point exceeding the required 50 percent the employee’s salary is paid by the employer during their leave. Therefore, the maximum credit that can be claimed by an employer if 25 percent. The maximum credit of 25 percent would be in the instance where an employer paid their employee 100 percent of their salary while they were on leave. Example: (12.5% + [50% x 0.25%]) This credit is limited to the number of hours the employee takes for family and medical leave, multiplied by the normal hourly rate of pay paid by the employer. In the future the IRS will establish a method to convert non-hourly rate to hourly.
It’s important to consult with your local CPA to fully understand if your employees are truly eligible for your business to claim this new tax credit and how to correctly calculate the credit for family and medical leave. For more understanding, you can visit the IRS website where they have posted FAQs regarding this new tax credits.
By: Paige Knight
