Don Warrant, CPA
Director | Tax Practice
Good news for employers: eligibility, coverage and scope of the tax credit
In connection with the 2017 Tax Cuts and Jobs Act, Congress created a new tax credit for employer paid family and medical leave. Employers of all types, sizes, industries, and legal status are eligible for the credit, pending the eligibility of the employee requesting leave and in some circumstances, payments made by a State or local government’s paid leave program.
The new tax credit applies to wages paid in taxable years beginning after December 31, 2017 and before January 1, 2020.
What Does the Federal Paid Leave Tax Credit Cover?
Family and medical leave includes leave to care for the birth of a child, the adoption or foster care of a child, to care for a spouse, parent, or child who has a serious health condition, to care for the employee’s own serious health condition, or any qualified exigency arising from a spouse, parent, or child who is either on active duty, or who has been notified or called to active duty in the Armed Forces, or to care for a service member.
Unfortunately, the tax credit doesn’t apply when leave is paid by a State or local government or required by State or local law.
Starting January 1, 2018, New York State’s Paid Family Leave provides New Yorkers with job protected, paid leave to bond with a new child, care for a loved one with a serious health condition or to help relieve family pressures when someone is called to activity military service abroad. Since New York State requires participation by all private employers, the wages paid to qualifying employees are not eligible for the tax credit.
Scope of the New Family/Medical Tax Credit
For other eligible employers, the new tax credit is 12.5% of the amount of wages paid to qualifying employees while on family and medical leave provided such employee receives at least 50% of their normal wages.
A few other noteworthy aspects of the new tax credit:
- The credit percentage increases by .25% (capped at 25%) for each percentage point by which the employee is paid in excess of 50% of their normal wages while on family or medical leave.
- The amount of wages that may be taken into account in computing the tax credit is limited to a maximum 12-week period per tax year per qualified employee. The employer is required to reduce their wage deduction by the amount of the tax credit. In order to claim the tax credit, the employer must have a written policy allowing qualified full-time employees not less than 2 full weeks of annual paid family and medical leave, and a commensurate amount for part-time employees.
- To qualify, the employee must have been employed for at least 1-year before taking family and medical leave and their compensation for the preceding year cannot exceed $72,000 which is 60% of the threshold for highly compensated employees under IRC Section 414(q)(1)(B).
Got Questions? Connect with a Freed Maxick Tax Expert
This new federal paid leave tax credit is just one of the changes - many of them advantageous to employers - coming from the new Tax Act. It’s a smart move to plan for taking advantage of these changes now.
Connect with us and let’s do a complimentary review of your situation to look for opportunities and ways to minimize your Federal and State tax obligations. Call us at 716.847.2651, or complete and submit a request for a Tax Situation Review, today.