The IRS has issued FAQs to provide guidance to employers relating to portions of the newly enacted Tax Cuts and Jobs Act of 2017 that created the Paid Family and Medical Leave Tax Credit. The tax credit, provided in Internal Revenue Code section 45S, allows eligible employers to claim a general business tax credit up to 25 percent of the wages paid to qualifying employees when such employees take family and medical leave.
To be eligible for the credit, the employer must have a written policy in place that provides for at least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part time). In addition, while on leave, the employees must be paid at least 50 percent of the wages they normally receive. A qualifying employee is any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain threshold amount. For an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017.
While the FAQs parrot some of the requirements of Section 45S, they do clarify several definitions. For example, the FAQs make clear that for purposes of the credit, “paid family and medical leave” includes time off for the following:
- Birth of an employee’s child and to care for the child.
- Placement of a child with the employee for adoption or foster care.
- 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 the functions of his or her position.
- Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
The FAQs note that if an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above), paid leave is not considered family and medical leave. In addition, any leave paid by a state or local government or required by state or local law will not be taken into account in determining the amount of employer-provided paid family and medical leave.
Other FAQs address the timing of the credit, which applies only for 2018 and 2019, how to calculate the tax credit, which varies between 12.5 and 25 percent, and how to adjust the deduction for wages if the credit is taken. The FAQs also state that employers should anticipate additional FAQs on the following questions:
- When the written policy must be in place;
- How paid “family and medical leave” relates to an employer’s other paid leave;
- How to determine whether an employee has been employed for “one year or more”;
- The impact of state and local leave requirements; and
- Whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.
We will continue to monitor additional IRS guidance on this issue and report on any significant developments.