IRS guidance on tax credit for paid family and medical leave

On April 9, 2018, the IRS issued a set of frequently asked questions (FAQs) that address the employer credit under Internal Revenue Code Sec. 45S for paid family and medical leave ( ⁵). The credit, which was enacted under the Tax Cuts and Jobs Act of 2017, is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017 ( ¹⁰). It is not available for wages paid in taxable years beginning after December 31, 2019.

Claiming the credit. The credit is a general business credit employers may claim, based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions. An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Also, any wages taken into account in determining any other general business credit may not be used in determining this credit.

To claim the credit, employers must have a written policy in place that meets certain requirements, including:

• provision of 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); and

• the paid leave is not less than 50 percent of the wages normally paid to the employee.

Calculating the credit. The FAQs indicate that 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 taxable 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, with a maximum of 25 percent. In certain cases, an additional limit may apply.

Qualifying employee. A qualifying employee is any employee under the Fair Labor Standards Act (FLSA) 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 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.

Reasons for leave. For purposes of the credit, “family and medical leave” is leave for one or more of the following reasons:

• 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 clarify 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), that 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.

Additional information. The IRS expects to provide additional information that will address the following:

• 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.