The federal Tax Cuts and Jobs Act of 2017 contains an often-overlooked tax credit for employers that provide qualifying types of paid leave to their full- and part-time employees. The credit is available to any employer, regardless of size, if:
- The employer provides at least 2 weeks of paid family and medical leave annually for employees who have been with the company for at least 12 months
- The paid leave is at least 50 percent of the wages normally paid to the employee
The IRS has issued a set of frequently asked questions and a notice to help employers understand the tax credit, which is only available for wages paid in 2018 and 2019. The notice, entitled Notice 2018-71, is effective as of Sept. 24, 2018, and similarly only applies to wages paid in 2018 and 2019. Here are some of its highlights:
- Calculating and claiming the credit For an employer that offers paid leave in the amount of 50 percent of an employee’s wages, the tax credit is 12.5 percent of the amount paid. The credit is increased by 0.25 percent for each percentage point by which the paid leave exceeds 50 percent of the employee’s normal wages, but it is capped at a maximum credit of 25 percent.
- Eligible employer An employer does not have to be subject to the Family and Medical Leave Act (FMLA) to take advantage of the tax credit. Any employer will be eligible for the credit if it has a written policy in place that provides paid family and medical leave, satisfies the minimum paid leave requirements, and, if applicable, includes certain required “non-interference” language. The employer must include this “non-interference” language in its written policy if it employs at least one qualifying employee who is not covered by Title I of the FMLA. The “non-interference” language must state that the employer will not interfere with, restrain, or deny the exercise or attempted exercise of any right provided under the paid leave policy, and will not discharge or discriminate against any individual for opposing any practice prohibited by the policy.
- Qualifying employee A qualifying employee is an employee who has been employed by the employer for one year or more, and who made less than $72,000 in compensation in 2017. Until further guidance is issued, an employer may use any reasonable method to determine whether an employee has been employed for one year or more. However, any requirement that an employee work 12 consecutive months to be a qualifying employee will not constitute a reasonable method.
- Classifications of employees An employer’s written policy must provide at least 2 weeks of annual paid family and medical leave to all qualifying employees who are not part-time employees, and at least a proportionate amount of annual paid family and medical leave to all qualifying employees who are part-time employees. The policy may not exclude any classification of employees (for example, collectively bargained employees) if they are qualifying employees.
- Effective date of policy Generally, the employer’s written policy must be “in place” before the paid family and medical leave for which the employer claims the credit is taken. The written policy is considered to be “in place” on the later of the policy’s adoption date or the policy’s effective date. Additionally, eligible employers who establish a qualifying paid leave program or amend an existing program by Dec. 31, 2018 will be eligible to claim the tax credit retroactively to the beginning of the employer’s 2018 tax year for qualifying leave already provided.
- Family and medical leave Paid leave made available to an employee qualifies as “family and medical leave” under the tax credit only if the leave is specifically designated for one or more FMLA purposes, is not to be used for any other reason, and is not paid by a state or local government or required by state or local law. If an employer provides paid leave as vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the FMLA purposes), that paid leave is not considered family and medical leave under the tax credit. However, paid leave provided under an employee’s short-term disability program may qualify as family and medical leave under the tax credit if it otherwise meets the requirements to be family and medical leave under the tax credit.
In addition to the provisions listed above, the notice announces that the Treasury Department and the IRS intend to publish proposed regulations on the tax credit in the future. Until that time, however, employers who are considering implementing a paid leave policy should familiarize themselves with this tax credit and analyze how the credit might impact their decision. Because the tax credit is available only for wages paid in 2018 and 2019, employers should consult their attorneys and/or financial advisors to determine whether instituting a paid leave policy merely to claim this credit is worth the cost.