Employer Tax Credit for Paid Family and Medical Leave

Pursuant to § 45S of the Internal Revenue Code (Code), employers that provide paid family and medical leave to their workers may qualify for a general business credit. The tax credit is a percentage of wages paid between January 1, 2018 and December 31, 2019 only.

Qualifying Employer

The credit is designed to encourage employers to pay wages to employees who are on a leave of absence due to family or medical needs. It is not limited just to absences that are covered by the federal Family and Medical Leave Act (FMLA). Employers of any size, whether subject to the FMLA or not, may qualify for the § 45S credit if they have a written policy to:

• Provide at least two weeks of paid family and medical leave each year to qualifying employees who work full time (prorated for part-time employees); and
• Pay at least 50 percent of the qualifying employee’s regular wages during the paid leave.

Qualifying Employee

A qualifying employee is any employee covered under the Fair Labor Standards Act who meets the following conditions:

• Has completed one year or more of service with the employer; and
• Had compensation for the preceding year that did not exceed 60 percent of the highly-compensated-employee threshold. (For 2018, this means the employee’s 2017 compensation did not exceed $72,000.)

Qualifying Leave

Qualifying family and medical leave means an absence is for one or more of the following reasons:

• The birth of an employee’s child and to care for the child.
• Placement of a child with the employee for adoption or foster care.
• Leave 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.
• Leave to care for a service member who is the employee’s spouse, child, parent, or next of kin.

On the other hand, if the employer provides paid vacation, personal leave, or medical or sick leave (other than leave specifically for one or more of the reasons above), that leave is not a qualifying family and medical leave.

In addition, any leave paid by a state or local government, or required by state or local law (such as California State Disability Insurance), cannot be taken into account in determining the amount of employer-paid family and medical leave.

Tax Credit

The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per tax year. The minimum percentage is 12.5 percent and is increased by 0.25 percent for each percentage point by which the amount paid to a qualifying employee exceeds 50 percent of the employee’s wages, up to a maximum of 25 percent. In certain cases, an additional limit may apply.

For example, if the employee’s regular wages are $500 per week and the employer pays 50 percent of wages during the leave, the credit is $31.25 per week ($500 x 0.5 x 0.125). If the employer pays 100 percent of the employee’s regular wages, the credit is $125 ($500 x 0.25).

Summary

Federal law does not require employers to pay wages to employees who are absent from work due to family or medical leave (state or local laws, in some jurisdictions, may require paid leave). Employers that have a written policy to provide two weeks or more of paid leave for certain types of family and medical leave may be eligible for a tax credit with respect to wages paid in 2018 and 2019.