The new tax law, known as the Tax Cuts and Jobs Act of 2017, makes changes to the corporate and individual tax rates, but another aspect of the law is that it provides a tax credit to employers that offer paid family and medical leave to their employees. Most family and medical leave policies provide an employee with job protection as is required by laws such as the Family and Medical Leave Act (FMLA), but such laws do not require that the employer pay the employee for the time they are on a covered leave. The tax credit provided under the Tax Cuts and Jobs Act of 2017 will be available to employers for taxable years starting January 1, 2018 and will end for taxable years that start after December 31, 2019. Future legislation could make the program permanent.
Employers providing paid family and medical leave are eligible for a credit of up to 25% of the amount paid to qualifying employees who are on leave. This is dependent on the percentage of the employee’s wages that are paid while on family and medical leave. There are certain requirements to what the employer must offer in order to be eligible for the credit. The employer must pay the employee at least 50% of the employee’s regular wages during the leave period. In addition, the employer must have a written policy in place that outlines the paid family and medical leave benefit offered to employees. All full-time employees must be offered the benefit and part-time employees must be offered the benefit as well, but on a pro-rata basis. The employer must offer the benefit for at least two weeks for full time employees. Finally, the two weeks of paid leave cannot be provided to employees as part of their vacation, personal, medical or sick leave, the policy for paid family and medical leave must be a separate policy or provision. If the employer pays 50% of the employee’s regular wages, the employer may claim a 12.5% tax credit. As the amount of wages paid during the leave increases, the amount of the credit will increase, up to a maximum of 25% for employees who are paid 100% of their regular earnings. The maximum amount of leave taken into account is 12 weeks for the tax credit.
The credit can only be applied for workers who have been employed with the employer for at least one year. The credit is also limited to those who were paid no more that $72,000 for 2017. This wage ceiling will be adjusted for inflation after 2017.
Employers interested in taking advantage of the tax credit should think about creating the policy that will allow them to be able to take advantage of it in 2018. It is important to review state and local leave laws and make sure the policy does not conflict. A company cannot claim the credit where paid leave is a requirement under a state or local regulation.