The TCJA created a new tax credit for eligible employers to claim a tax credit for wages they pay to qualifying employees who are on family and medical leave (FMLA). This new credit is only temporary, since it applies only to wages paid in the employer’s tax years that begin in 2018 or 2019. Therefore, it is important for employers to determine whether they are eligible to claim this credit before it is gone.
To claim the credit, the employer must have a written policy in place that provides at least two weeks of paid “family and medical leave” annually to all “qualifying employees” who work full-time (the two- week minimum is prorated for employees who work part-time). The paid leave can't be less than 50% of the wages normally paid to the employee.
A “qualifying employee” is any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who had compensation of not more than a certain amount in the prior year. For an employer claiming a credit for wages paid to an employee in 2018, the employee can't have earned more than $72,000 in 2017.
For purpose of the credit, “family and medical leave” is leave for one or more of the following reasons:
- Birth of an employee's child and to care for the child
- Placement of a child with the employee for adoption or foster care
- To care for the employee's spouse, child, or parent who has a serious health condition
- A serious health condition that makes the employee unable to perform the functions of his or her position
- Any qualifying exigency because of an employee's spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces
- To care for a service member who is the employee's spouse, child, parent, or next of kinIf an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above), that paid leave isn't considered family and medical leave, nor is any leave paid by a state or local government or required by state or local law.
The credit is calculated by multiplying the wages paid by a percentage. The minimum percentage is 12.5% but is increased by .25% for each percentage point by which the amount paid to the employee exceeds 50% of the employee’s wages. Thus, if the employee is paid 100% of their normal wages, the percentage used for calculating the credit will be 25%.
Of course, additional guidance is still needed from the IRS regarding when the written policy must be in place, how paid family and medical leave relates to an employer's other paid leave, how to determine whether an employee has been employed for one year or more, the impact of state and local leave requirements, and whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.