The recent Tax Cuts and Jobs Act provides a federal tax credit to eligible employers that voluntarily provide paid family and medical leave to their employees. An employer that provides paid family and medical leave may claim a credit based on an employee’s qualifying wages. The credit is equal to a percentage of wages paid to qualifying employees while they are on family and medical leave.
The tax credit is available to employers whether or not the employer is covered by the Family and Medical Leave act (50 + employees).
The IRS has now issued guidance on this credit. The guidance covers employer eligibility, how to calculate the tax credit, effective dates, and other important information.
To receive the credit, an employer must have a written policy that:
• Provides at least two weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for each part-time qualifying employee. According to the IRS, only paid family and medical leave provided to employees whose prior-year compensation was $72,000 or less qualify for the credit.
• Provides for payment of at least 50 percent of the qualifying employee’s wages while the employee is on leave.
• If an employer has qualifying employees who are not covered by the FMLA, the written policy must include language providing “non-interference” protections (described in the guidance).
State and Local Paid Leave Laws
Any leave paid by a state or local government or required by state or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer. Thus, any such leave is not taken into account in determining the amount of paid family and medical leave provided by the employer, the rate of payment under the employer’s written policy or the determination of the credit.
In California, employees may receive up to six weeks of paid family leave credit through the state Employment Development Department. In addition, certain local ordinances - like San Francisco’s paid parental leave - may affect the availability of the tax credit. This may affect employer eligibility for the tax credit.
• Determine whether your company wants to take advantage of the tax credit.
• Review written leave policies and practices to determine whether your company can take advantage of this tax credit.
• Consult with an experienced tax advisor regarding the availability of this credit in California and in your municipality.
• An eligible employer must file IRS Form 8994, Employer Credit for Paid Family and Medical Leave and IRS Form 3800, General Business Credit, with its tax return to claim the credit.