The New Federal Paid Leave Tax Credit

The new federal tax act created a credit for employers that provide paid family and medical leave to employees. This will be in effect at least until the end of 2019.

The IRS and Treasury Department have not yet issued official guidance regarding the credit as of yet.

Tax Credit Summary

Employer Credit for Paid Family and Medical Leave:

  • Eligible employers can claim a general business credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA).
  • To receive the credit, employers will have to provide at least two weeks of leave and compensate workers at a minimum of 50 percent of their regular earnings.
  • The credit will range from 12.5 percent to 25 percent of the cost of each hour of paid leave, depending on how much of a worker’s regular earnings the benefit replaces. The government will cover 12.5 percent of the benefit’s costs if workers receive half of their regular earnings, rising incrementally up to 25 percent if workers receive their entire regular earnings.
  • Employers can only apply the credit toward workers who have been employed at the organization for at least a year and who were paid no more than $72,000 for 2017. This wage ceiling will be adjusted for inflation going forward.
  • 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 prorated basis.
Employer Actions

With additional regulations forthcoming, employers will need to have a written policy that provides at least two weeks of paid leave for family and medical leave at not less than 50 percent of wages for full-time, and a prorated amount for part-time, employees.

To be considered for the tax credit, the paid family and medical leave has to be a separate provision in the employer’s policies.

Employers should also review state and local leave legislation to ensure that there are no conflicts with the leave-credit program. The credit does not apply with respect to paid leave that is mandated under state or local law.

Employers that provide paid family and medical leave for employees who aren’t covered under the Family and Medical Leave Act also must include a nonretaliation provision in the policy.

We will update this post when more guidance is issued.