New credit for employer paid family and medical leave created by the recent Tax Act

The recent Tax Act creates a new credit as an incentive to employers who provide paid family and medical leave for FMLA reasons.  Some of those reasons include an employee’s serious health condition, parental leave, caring for a family member, or the demands due to the military deployment of the employee’s family member. The credit does not include paid leave for vacation, personal leave, or other medical or sick leave not considered to be family and medical leave.

In order to qualify for the credit, the employer must have a written policy allowing full-time qualified employees at least two weeks of annual paid family and medical leave.  A proportionate amount of leave is pro-rated for less than full-time qualified employees. The general business credit allows employers to claim a credit equal to 12.5% of wages paid to qualifying employees for up to 12 weeks during the family and medical leave as long as the employee is paid at least 50% of the wages they are normally paid. The tax credit increases by 0.25% for each percentage point that the rate of payment exceeds 50%.  The tax credit is maximized at 25%. It is effective for wages paid after 12/31/17 and is set to expire on 12/31/19.

A qualified employee is defined as an employee that has been employed for at least one year and had compensation for the previous year not exceeding 60% of the compensation threshold for highly compensated employees.  The compensation threshold for highly compensated employees for 2018 through 2019 is $120,000.

Additionally, leave paid by a state or local government or that is required by state law cannot be used to determine the amount of family and medical leave provided by the employer.

Please contact your Hertzbach tax professional if you have questions regarding how the new credit may benefit you.