The 2017 Congressional Tax Cuts and Jobs Act is a tax act that may have federal tax credit implications for your organization
The recent “Tax Cuts and Jobs Act” offers many changes that impact businesses of all sizes in all industries. There are several tax incentives in the act, including a new tax credit that companies should consider. This new provision provides a tax credit for businesses that offer paid family and medical leave for their employees. To take advantage of the credit, employers are urged to document their Family Medical Leave Act (FMLA) policies separately from their Paid Time Off (PTO) policies.
The IRS issued Notice 2018-71 (click here to view this Notice) on September 24, 2018, and this offers detailed guidance on the tax credit in a question and answer format. The notice clarifies how to calculate the credit and the application of special rules and limitations. It is important that your organization’s key HR and Finance leaders (and your accounting firm) are fully aware of these guidelines so that you can take the necessary steps to claim this valuable credit. Under new Section 45S, employers that voluntarily offer qualifying employees up to 12 weeks of paid family and medical leave annually under a written policy may claim a tax credit for a portion of the wages paid during that leave.
- Leave that is paid by a State or local government or required by State or local law is not considered in determining whether an employer’s written policy provides a rate of payment of at least 50 percent of the wages normally paid to an employee for services performed for the employer. To be eligible to claim the credit, an employer must independently satisfy the minimum paid leave requirements, including providing a rate of payment of at least 50 percent of wages normally paid to an employee. So, if an employer satisfies the required state leave policy and above that offers paid leave of a least 50%, this additional paid leave will be eligible for the credit. (See Question #21 in Notice 2018-71.)
- For tax year 2018, employers can apply the credit only toward workers who were paid less than $72,000 by the employer in 2017. This wage ceiling will be adjusted for inflation going forward.
- Employer’s must provide at least two weeks of paid family and medical leave for employees taking leave that would otherwise be unpaid under the Family and Medical Leave Act.
- Employer’s must compensate their workers a minimum of 50 percent of their regular earnings during the minimum two-week leave period.
- The amount of this credit is 12.5 percent of the benefit’s costs if workers receive half of their regular earnings and rises incrementally to 25 percent if workers receive paid leave of their entire regular earnings.
- An employer is not required to provide paid family and medical leave for every type of FMLA leave to claim the credit. Further, the employer’s policy can provide paid leave to care for additional individuals for whom care under the FMLA purpose is not required. The employer, however, may not claim the credit for any leave taken to care for an individual other than a qualifying employee’s spouse, parent, or child. (See Question #10 in Notice 2018-71.)
- Both full-time and part-time workers, if employed at the organization for at least a year, must be offered paid leave for an employer to be able to claim the tax credit.
- Employers must allow part-time employees to take a commensurate amount of paid leave, determined on a pro–rated basis.
- Employers that provide paid family and medical leave for employees who aren’t covered under the Family and Medical Leave Act must include a written non-interference provision (or non-retaliation), ensuring that employees will not be penalized for taking paid leave.
- Section 45S refers to the definitions for leave eligibility found in the FMLA, however, the tax credit applies to all employers, not only those covered by the FMLA.
- Finally, an eligible employer must file IRS Form 8994, Employer Credit for Paid Family and Medical Leave, to claim this new tax credit.
Document, Document, Document
The key point is that the employer is required to have a written policy that provides at least two weeks of paid leave for family and medical leave at no less than 50 percent of wages for full-time, and a pro–rated amount for part-time, employees.
The two weeks of paid leave cannot be provided as vacation, personal, medical, or sick leave. It is important to note that the paid family and medical leave must be a separate provision in the employer’s policies. Most company PTO policy statements will not qualify for this tax credit.
Missed the 2018 Window? Take Steps Now to Take Advantage of the Credit for 2019!
IRS Notice 2018-71 clarified that paid leave policies could be amended retroactively for the 2018 year to conform to the technical requirements of Code Section 45S, so long as the amendment was adopted by December 31, 2018. If you missed the window for 2018 credits, you can still prepare your organization for 2019. Work with your HR, Finance, and Accounting professionals to ensure the proper policies are in place to benefit from this new tax credit for leave taken during 2019. IRS Notice 2018-71 specifies that the employer’s written policy must be in place before the paid family and medical leave for which the employer claims the credit is taken. The written policy is considered to be in place on the later of the policy’s adoption date or the policy’s effective date (please see Question 5 in Notice 2018-71). Employers are also encouraged to review state and local leave legislation to ensure that there are no conflicts with the leave-credit program. Please contact your Sikich HR professional with any questions you have or assistance you need with this new tax credit for paid family and medical leave.
- IRS: Section 45S Employer Credit for Paid Family and Medical Leave FAQs
- SHRM.org: Taking Advantage of the Federal Paid-Leave Tax Credit
- Benefits Pro: How to take advantage of new paid family, medical leave tax credits
- SHRM.org: IRS Answers Questions on Paid Family Leave Tax Credit
PATTIE WAGNER, SPHR
Pattie has years of experience working in a variety of industrial, high-tech, consumer, and financial settings. She has also assisted both for-profit and not-for-profit organizations at the global, multi-national, and local levels. Among her many talents, Pattie excels at providing her clients with leadership development, program management, organizational design, and more.