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The Tax Cuts and Jobs Act includes a new tax credit for employers providing their employees with qualified paid family and medical leave to employees. The credit is only available for two tax years, those beginning between January 1, 2018, and December 31, 2019. Even with this short time frame, qualifying for the credit is worthwhile for many companies.
Calculating the credit
Employers can claim a credit equal to 12.5% of wages paid to employees who are on family and medical leave if these payments are at least 50% of the normal wages paid to the employee. For each 1% increase over 50% of normal wages, the credit rate increases by 0.25%, capping at a maximum rate of 25%.
Eligible employees are those who have worked for the company for at least one year, with compensation for the preceding year not exceeding 60% of the threshold for highly compensated employees for that year. The 2019 threshold for highly compensated employees is $125,000 (an increase from the $120,000 threshold for 2018). This means that a qualifying employee’s compensation cannot exceed $72,000 (60% of $125,000).
Deductions for wages and salaries must be reduced by the amount of the family and medical leave credit used.
Family and medical leave for the purpose of this credit is time taken off by a qualifying employee for one of the following reasons:
- The birth, adoption, or fostering of a child (and to care for the child)
- To care for a spouse, child or parent with a serious health condition
- If the employee has a serious health condition
- Any qualifying need due to an employee’s spouse, child, or parent being covered active duty in the Armed Forces (or being notified of an impending to call or order to covered active duty)
- To care for a spouse, child, parent or next of kin who’s a covered veteran or member of the Armed Forces
Employer-provided medical or sick leave (other than defined above), vacation, or personal leave is not eligible for the credit.
Establishing a policy
To claim the credit for the first tax year beginning after December 31, 2017, your written family and medical leave policy must be in place before the paid leave is taken.
However, a favorable transition policy for the first tax year after December 31, 2017, allows your company’s written leave policy (or amendment to existing policy) to be in place as of the effective date of the policy, before the adoption date.
The new family and medical leave credit is an excellent option for many companies. However, its application to all qualifying full-time employees can make it expensive. We can discuss the policy in further detail with you.
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