If your organization wants to claim the new family and medical leave credit, take note: The IRS has issued Form 8994, Employer Credit for Paid Family and Medical Leave, for use in 2018 and 2019 tax year filings. In addition, the IRS has posted new information about the credit on its website. Here’s what you need to know.
The leave credit was authorized by 2017’s Tax Cuts and Jobs Act. Under the law, an employer can qualify for a credit if it provides qualified employees with leave of at least two weeks and pays at least 50% of the worker’s regular earnings during that period. Of course, an employer can choose to pay the employee’s regular salary during the leave period.
This credit can be valuable to your organization. If you pay 50% of an employee’s regular pay rate while the individual is on leave, the credit will be equal to 12.5% of wages. This percentage gradually increases until it maxes out at 25% for employers that pay full wages.
To qualify, you must offer leave time to both full- and part-time employees who have worked for you for more than one year. You also must establish a written policy on family and medical leaves. Finally, “double-dipping” isn’t permitted. In other words, if you claim the leave credit, you can’t also deduct the employee’s wages as regular business expenses.
Digging into Details
As with claiming most tax credits, the devil is in the details. Following are several questions and answers to help employers with tax planning:
Q. For the purpose of the credit, who’s considered a qualified employee?
A. A qualified employee is any worker under the Fair Labor Standards Act whom your organization has employed for at least one year. However, the credit isn’t available for employees who are paid more than $72,000 annually (indexed for inflation).
Q. What is a “qualified leave?”
A. The rules are essentially the same as they are for leaves under the Family and Medical Leave Act (FMLA). This means leave can generally occur for these reasons:
- Birth of an employee’s child and to care for the child,
- Adoption or foster care placement of a child with the employee,
- 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 his or her job functions;
- Any qualified exigency due to an employee’s spouse, child or parent being on covered active Armed Forces duty, or
- To care for a service member who is the employee’s spouse, child, parent or next of kin.
If you provide paid vacation, personal or sick leave (or leave that isn’t specified for one or more of the reasons listed above), the paid leave is not considered family and medical leave.
Q. What must be included in a written policy?
A. Your plan needs to state that your organization provides:
- At least two weeks of paid leave for all qualified employees who work full-time, and that part-time employees are eligible for prorated benefits; and
- The amount paid during leave will be at least 50% of the wages normally paid to the employee.
Your written plan must be in place on the latter of 1) the policy’s adoption date or 2) its effective date.
Q: How is the credit calculated?
A: Generally, the credit is a percentage of the amount of wages paid to a qualified employee while on family and medical leave, for up to 12 weeks per tax year. The minimum percentage of 12.5% is increased by 0.25% for each percentage point by which the amount paid to a qualified employee exceeds 50% of his or her wages. The maximum credit is 25% of wages.
For example, if a company pays an employee 70% of his or her regular pay on wages of $10,000, the company can claim a credit of 17.5% of the wages, or $5,250.
Q: What’s the effective date of the credit?
A: The credit is generally effective for wages paid by your organization in tax years starting after 2017. Currently, it isn’t available for wages paid after 2019.
Time Running Out
Time is running out if your company wants to take advantage of this unique tax break. The leave credit is only available for 2018 and 2019 — although Congress could extend it. Discuss this tax break and other tax issues with your professional advisors.