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April 25, 2018 | Posted in:

Tax Reform Introduces a Tax Credit for Paid Employee Leave

Alloy Silverstein’s Tax Tip of the Week

The new Tax Cuts and Jobs Act (TCJA) includes significant changes for individuals and businesses alike, enhancing some tax breaks and eliminating or reducing others. One new provision creates a new tax credit for employers who pay wages for family and medical leaves.

Eligible employers can claim a credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA).

Types of eligible family leave

The FMLA entitles employees leave for:

  • the birth of a child and to care for a newborn within one year of birth;
  • the placement with the employee of a child for adoption or foster care within one year of placement;
  • to care for the employee’s spouse, child, or parent with a serious health condition;
  • a serious health condition that makes the employee unable to perform the essential functions of his or her job;
  • any qualifying emergency need arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on “covered active duty”

Here’s how the new credit works

The IRS has yet to issue official guidance, but here are the basics:

  • To qualify for the credit, the employer must provide at least two weeks leave at a rate of at least 50 percent of regular earnings.
  • The credit percentage ranges from 12.5 percent to 25 percent of the paid leave based on the amount of wages. For instance, the credit is equal to only 12.5 percent of the wages if the employer pays the minimum 50 percent of the regular pay rate, but gradually increases to a maximum of 25 percent if the employer pays the normal wages.
  • The credit is available only for wages paid to workers employed at the company for at least a year who are paid no more than $72,000 annually in 2017, adjusted for inflation in future years.
  • Family and medical leave must be offered to both full- and part-time workers.
  • Employers need to have a written policy that includes two weeks paid leave for family and medical leave at 50 percent or more of wages for full-time employees. And the amount must be prorated for part-time employees.
  • Leave that is paid for or required under state and local law shouldn’t be considered when determining the amount of paid family and medical leave
provided by the employer.

 

At this time, the new credit has a short shelf life, taking effect in 2018 and only lasting through 2019. However, there’s a chance it will be extended by future legislation.

 

Credit vs. Deduction: No double dipping

Finally, if the employer claims the credit, they can’t also deduct the wages as regular business expenses. Usually, the credit will be more valuable to employers than the deduction.

If you have questions about how this credit affects your situation, give Alloy Silverstein a call.
© MC 2018 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

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