Buried in the 2017 Tax Cuts and Jobs Act, there is now a general business tax credit employers may claim which is based on wages paid to qualifying employees while they are on family and medical leave. To be eligible for the credit, employers must have a written policy in place that provides at least two weeks of paid family and medical leave on an annual basis to all qualifying employees who work full time and which is prorated for employees who work part time. In addition, the paid leave cannot be less than 50 percent of the wages normally paid to the employee.
The Act defines a qualifying employee to be any employee who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain amount, which is currently $72,000.
The leave may be taken for one or more of the following reasons:
- Birth of an employee’s child and to care for the child;
- 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;
- A serious health condition that makes the employee unable to perform the functions of his or her position;
- Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces; and
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
Paid vacation, personal leave, or other paid medical or sick leave is not considered paid family and medical leave for purposes of the tax credit. In addition, any leave paid by a state or local government or required by state or local law will not be taken into account in determining the amount of employer-provided paid family and medical leave.
The tax credit is a percentage of the amount of wages paid to the employee while on the family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to the employee exceeds 50% of the employee’s wages, with a maximum of 25%. An employer claiming the credit must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit.
The credit is available for wages paid in taxable years of the employer beginning after December 31, 2017, and will not available for wages paid in taxable years beginning after December 31, 2019.