Employers paying wages while qualifying employees are on family or medical leave could be rewarded in their 2018 and 2019 tax returns thanks to the Tax Cuts and Jobs Act. The Family and Medical Leave Credit allows for qualifying employers that pay at least 50% of the salaries of employees on family or medical leave up to a 25% credit on those qualifying wages. Consideration should be given to the potential applicability of this credit with year-end planning and certainly come filing season.
Who is Eligible:
Qualifying employers are those with a written policy in place to pay at least 50% of normal wages (excluding overtime pay or bonuses without regard to any paid leave required by a State or local government) while an employee is on family and medical leave. The policy must provide at least two weeks of paid family and medical leave to all qualifying full-time employees with the two-week requirement prorated for part-time employees (those working less than 30 hours per week).
If no policy is in place at the beginning of 2018, there is a transition rule that allows for a retroactive effective date as long as the employer brings its leave practices into compliance with the terms of the new agreement and makes any retroactive leave payments no later than the end of the employer’s tax year.
What Qualifies as “Family and Medical Leave”:
Family and medical leave for purposes of the credit is defined as FMLA §§102(a)(1)(A)-(3) and (3). Eligible leaves for purposes of the credit include:
- The birth and care of a newborn child of the employee;
- The 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;
- The employee’s inability to perform the functions of his or her position due to a serious health condition;
- A qualifying “exigency” arising from the fact that the employee’s spouse, child, or parent is on “covered active duty” or “has been notified of an impending call or order to covered active duty” in the armed forces; or
- For a qualifying employee who is the spouse, child, parent, or next of kin of a covered service member, to care for the service member.
What are the details of the credit:
For eligible wages, the applicable percentage is 12.5% increased by 0.25 percentage points by which the wages paid for family and medical leave exceed 50% of the employees’ normal wages. If an employee pays 100% of the employee’s normal wages, the credit percentage is equal to 25% (12.5% + 50% x 0.25%) of the wages paid not exceeding 12 weeks of leave.
The credit is limited to each employee’s number of hours taken for family and medical leave multiplied by that employee’s normal hourly rate of pay. Pending IRS regulations expected to be forthcoming, reasonable methods of converting non-hourly wages to an hourly rate will be allowed. The amount of deduction claimed for wages and salaries paid through the year must be reduced by the amount of credit claimed. Highly compensated employees (an employee paid more than $72,000 in the prior year) are not eligible to be included in the computation of the credit.
Since this is a general business credit, it will be claimed by filing Form 8994, Employer Credit for Paid Family and Medical Leave and Form 3800, General Business Credit with a timely filed tax return.
What should you do by December 31, 2018:
- If your organization does not have a written FMLA policy but would like to take advantage of the credit, your policy must be in place by December 31, 2018. To satisfy the requirements of the credit, all eligible leave payments for 2018 pursuant to the policy must be made by December 31, 2018.
- If your organization has a written FMLA policy in place and have been making the necessary eligible leave payments, then nothing is required to be done by December 31, 2018.
As part of your 2018 tax year-end planning, please provide a copy of your FMLA policy to your Lurie advisor.
If you have any questions or would like more information on this topic, please contact your Lurie advisor.