When it comes to employee talent, you compete with other employers in a variety of ways. Benefits are very important to an employee’s decision to stay with a business, and a good medical and family leave policy is one of the most important benefits that they consider.
If you have implemented a medical and family leave policy in your small business, the good news is that your federal government may have given you a dollar for dollar tax credit.
For the next two employer tax years— those beginning between January 1, 2018, and December 31, 2019—the Tax Cuts and Jobs Act (TCJA) establishes a new federal income tax credit for employers that provide qualifying paid family and medical leave benefits to their employees.
If for tax purposes your business operates on a calendar year, you can put your business in a position today to claim the tax credit for both the 2018 and 2019 tax years. But you will need to do so quickly.
If eligible, you can claim a credit equal to 12.5 percent of wages paid to qualifying employees who are on family and medical leave, as long as the leave payments are at least 50 percent of the normal wages paid to those employees.
A qualifying employee is one who has been employed by your company for at least one year and whose compensation last year was less than $72,000.
You can increase the credit beyond the 12.5 percent. For each 1 percent increase in medical leave payments over the 50 percent threshold, the credit rate increases by 0.25 percent, up to a maximum credit rate of 25 percent.
What qualifies for the credit?
“Family and medical leave” is defined as leave taken by a qualified employee for any of the following reasons:
- The birth of the employee’s son or daughter, in order to care for the son or daughter.
- The placement of a son or daughter with the employee for adoption or foster care.
- A serious health condition of the employee’s spouse, son, daughter, or parent.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter, or parent is a member of the Armed Forces (including the National Guard and Reserves) who is on covered active duty or has been notified of an impending call or an order to covered active duty.
- A serious injury or illness of a covered service member who is the employee’s spouse, son, daughter, parent, or next of kin.
The following leave is not considered eligible for the credit:
- Employer-provided vacation leave
- Personal leave
- Medical or sick leave (other than qualifying leave as defined above)
- Leave that is paid by a state or local government or that is required by state or local law.
The maximum length of paid family and medical leave taken by a specific employee who can qualify for the credit is 12 weeks per tax year of the employer.
When Must Your Company’s Family and Medical Leave Policy Be Established?
The general rule is that to claim the credit for your company’s first tax year that begins after December 31, 2017, your written family and medical leave policy must be in place before the paid family and medical leave for which the credit will be claimed.
However, under a favorable transition rule for the first tax year beginning after December 31, 2017, your company’s written leave policy (or an amendment to an existing leave policy) will be considered in place as of the effective date of the policy (or amendment) rather than the later adoption date.
That said, if you make the effective date of the policy January 1, 2019, your company can claim the credit for qualifying family and medical leave payments made on or after that date. This transition rule is available if:
- the policy or amendment is adopted on or before December 31, 2019, and
- you bring your leave practices into compliance with the terms of the retroactive policy (or amendment) for the entire period covered by the policy (or amendment), including making any retroactive leave payments by no later than the last day of the tax year.
Here’s an Example:
Say your company uses the calendar year for tax purposes. Your company adopts a written policy that satisfies all requirements of Section 45S on June 15, 2019, with an effective date of July 1, 2019.
Assuming your company met all other requirements for the credit, your company may claim the credit for the family and medical leave paid per that policy to qualifying employees for leave taken on or after July 1, 2019.
If you need help getting this policy in place for 2019, we can help—but we will need to hop on it immediately to get it done in time. Give us a call today at (732) 566-3660.