The Tax Cuts and Jobs Act of 2017 added the new Section 45S to the Internal Revenue Code, which provides a business tax credit for eligible employers who offer paid family and medical leave. The credit is currently only effective to wages paid in the taxable years of 2018 and 2019 and is summarized below.
Background
The Family and Medical Leave Act (FMLA) requires employers to provide certain employees with up to 12 weeks of job-protected unpaid leave for reasons such as the birth of a child, a serious health condition, caring for an immediate family member with a serious health condition, and other specified circumstances. The purpose of the family and medical leave tax credit is to encourage employers to provide paid leave for their employees.
Eligible Employers
To be eligible to claim the tax credit, employers must have a written policy that meets specific requirements. This policy must allow full-time qualifying employees at least two weeks of paid family and medical leave per year, and allow leave on a pro-rated basis for all qualifying part-time employees. Additionally, the paid leave must be at least 50% of the wages normally paid to the employee. Employers are eligible for this credit regardless of their number of employees.
Calculating the Credit
The credit ranges from 12.5% to 25% of the wages paid to qualifying employees while on family and medical leave. The credit starts at 12.5% and increases by 0.25% for each percentage point the employer’s payments exceeds 50% of the employee’s normal wages. The percentage cannot exceed 25% of the employee’s wages, which would occur if the employer provides 100% of normal wages to the employee while they are on leave.
| Percentage of Normal Wages Paid to Employees on Family and Medical Leave | Applicable Tax Credit Percentage |
| 0%-49% | 0% |
| 50% | 12.5% |
| 60% | 15% |
| 70% | 17.5% |
| 80% | 20% |
| 90% | 22.5% |
| 100% | 25% |
Qualifying Employees
A qualifying employee is one that has been employed by their employer for at least one year and did not earn more than 60% of the compensation threshold for highly compensated employees in the previous year. In 2017, this threshold was $120,000, meaning the maximum wage an employee could earn and still qualify for 2018 credits would be $72,000. The one year employment requirement and pay threshold may mean that many employees do not qualify.
Qualified Family and Medical Leave
The paid leave must be for the sole purpose of family and medical leave in order to qualify. If employees take leave for other reasons such as vacation, personal, or sick leave, the credit will not apply. Additionally, any leave that is paid by a state or local government or mandatory by state or local law will not be considered when determining the amount of paid family and medical leave provided by the employer.
Additional Considerations
Employers should be aware that they must reduce their deduction for employee salaries and wages by the amount of the credit they claim. Furthermore, any paid family and medical leave wages that are taken into account for another credit may not be used for this credit.
Many questions remain about the paid family and medical leave credit, and the IRS plans to provide additional information. While awaiting guidance, employers interested in the credit should review their leave policies to determine whether changes may be necessary to meet the requirements of Code Section 45S
