Under the Internal Revenue Code of 1986, as amended (the “Code”), businesses are entitled to a general business credit which is made up of several component credits, including the Work Opportunity Credit, the Indian Employment Credit, credits for employing and housing employees affected by Hurricane Katrina, and a number of others. The recently-enacted Tax Cuts and Jobs Act (“TCJA” or the “Act”) added a new component credit for businesses that qualify – the Paid Family and Medical Leave Credit (“FML Credit”).[1] This new credit entitles an eligible employer to a credit equal to anywhere from 12.5-25% of the wages that it pays to “qualifying employees” who are on covered leave, provided that employees are entitled to receive – and do receive – not less than 50% of their regular wages for their hours on covered leave. For this purpose, a “qualifying employee” is any employee (within the meaning of the Fair Labor Standards Act) who has been employed by the employer for at least 12 months and who, in the preceding year, received compensation not in excess of 60 percent of the amount applicable for such year under section 414(q)(1)(B)(i) of the Code (part of the definition of “highly compensated employee” for purposes of employee benefit plans); the applicable amount for 2017 was $120,000, so “qualifying employees” for 2018 cannot have earned more than $72,000 (i.e, $120,000 x .60) in 2017.

In order to be able to take the credit, the employer must have a written policy describing its leave program and providing that:

  • Full-time qualifying employees are entitled to two weeks (or more) of family and medical leave, and part-time qualifying employees are entitled to a proportionate amount of leave based on their respective work schedules;
  • The benefit payable during the leave is at least 50% of the employee’s regular pay; and
  • If the policy covers qualifying employees who are not covered by the Federal Family and Medical Leave Act (“added employees”), such as employees who do not satisfy the hours-worked requirement, the employer will not interfere with the exercise of the added employees’ rights under the policy, or discharge or in any way discriminate against an added employee for opposing any practice prohibited by the policy.

The actual amount of the credit depends upon the amount actually paid to the employees during the leave. If the employees are paid 50% of their regular wage (the minimum amount in order to qualify for the credit), the credit will be 12.5% of the wages paid. That percentage increases by 0.25 percentage points for each percentage point increase in the wages paid to the employees; the maximum credit, however, is 25% of the wages paid. So, for example, a benefit of 66% of regular wages would yield a credit of 16.5% of the wages [12.5% + (16 x 0.25%)]. A benefit of 100% gives a credit of 25% of the wages. In calculating the credit for a year, no more than 12 weeks of leave may be taken into account for an employee. In addition to the extent that the credit is taken for replacement wage payments, those wage payments are not deductible by the employer; a duplicate benefit is not permitted.

The leave to which this credit applies is, as mentioned above, generally the same as that described in the Family and Medical Leave Act. Furthermore, it makes no difference if the leave is actually provided under the Family and Medical Leave Act, or simply under the employer’s policy. If it meets the definition, then it can be taken into account as covered leave. That definition includes leave (other than vacation or personal leave) granted for any of the following reasons:

  • the birth of a child of the employee and in order to care for such child;
  • the placement of a child for adoption or foster care;
  • a serious health condition of a spouse, child, or parent requiring the employee to care for such person;
  • the employee’s serious health condition that makes the employee unable to perform the functions of the employee’s position;
  • any "qualifying exigency" arising out of the fact that the employee’s spouse, child, or parent is a member of the military who is on covered active duty or has been called to covered active duty status; or
  • to care for a covered service member with a serious injury or illness.

The FML credit is only temporary. It is available only with respect to wages paid in taxable years beginning in 2018 or 2019. It is also completely discretionary on the part of the employers; an eligible employer is free to claim the credit, or not, as it wishes, whether because a deduction might be more advantageous, or for any other reason.