As part of the Tax Cuts and Jobs Act signed into law in December 2017, the new law grants a tax credit for 2018 and 2019 for employers that voluntarily offer paid family and medical leave. To qualify for the credit, the employer's leave program must satisfy the following requirements:
The credit for the paid leave is calculated at the applicable percentage of wages paid to qualifying employees during the period of the qualifying leave. The applicable percentage starts at a base of 12.5 percent and increases .25 percent for each percentage point by which the rate of payment exceeds 50 percent and is capped at 25 percent.
Example of credit - Joe is paid $10,000 during his qualifying leave which is equal to 50% of his normal pay. The employer would be eligible for a credit of $1,250 ($10,000 * 12.5%). If instead Joe is paid $15,000, which represents 75% of his normal pay, then the credit percentage is increased by 6.25% (.25% times the percentage points the pay is in excess of 50% [(75-50)*.25%] for a total credit percentage of 18.75% resulting in a credit of $2,812.50 ($15,000*18.75%).
The IRS has released various clarifications relating to credit addressing which employers are eligible to claim the credit, what constitutes covered "family and medical leave", what must be in the written policy to claim the credit, and how to calculate and claim the credit. Some of the key clarifications are as follows:
The IRS is expected to issue additional guidance in the future through proposed regulations, but in the interim, Notice 2018-71 clarifies some of the requirements of the credit. Should you have any questions, please contact us in one of our many locations.