There is a new income tax credit available for employers under the Tax Cuts and Jobs Act (TCJA) of 2017. Effective in tax years beginning after 12/31/2017, and beginning before 01/01/2020, employers can claim a tax credit equal to 12.5% of wages paid to employees during any period that such employees are on leave, under the Family and Medical Leave Act (FMLA). To qualify for the credit, wages paid during the leave must be at least 50% of the employee’s normal wages. If the wages paid are 100% of normal wages, then the credit is 25% of wages paid. The credit is a sliding scale from 12.5%-25%, depending on the wage-level paid.
To qualify, the employer must have a written policy in place that allows for a minimum of 2 weeks and a maximum of 12 weeks of annual paid FMLA leave for full-time, qualified employees. It must also allow paid FMLA leave for part time employees, but to a lesser extent, based upon hours worked. The written policy must also require a rate-of-pay while on leave that is not less than 50% of an employee’s normal rate-of-pay. A qualified employee is any employee who has been employed for one year or more and whose compensation in the preceding year was $72,000 or less.
The paid leave must be allowed for normal FMLA circumstances such as:
- Birth of a child and/or care for such child
- Placement of a child by adoption or foster care
- Serious health condition of spouse, child or parent requiring the employee to care for them
- An employee’s health condition that makes the employee incapable of performing their normal functions and duties
If paid leave is in the form of vacation, sick, personal or some other type of paid time off (PTO), then these wages do not qualify for the tax credit. In other words, if the employee uses and is paid other kinds of PTO, such as vacation time while on FMLA leave, those other PTO wages do not qualify for this income tax credit.
There is no penalty or requirement for an employer to provide paid FMLA leave. This new tax credit simply incentivizes employers to do so. If you have any questions on this or other aspects of the TCJA, please call CPA Consulting Group, LLP at 307-577-4040.