Explanation, please: What’s the new credit for paid leave?
It’s safe to say that company policy isn’t made in the Payroll Department. But the new tax credit for paid FMLA leave, enacted as part of the Tax Cuts and Jobs Act (TCJA), allows you to be the bridge between HR and corporate tax, and, in the process, raise your profile within the company.
Credit calculations. The minimum credit is 12.5% of wages paid to employees who receive half their wages during their FMLA leave. The credit increases by 0.25% for each percentage point above which employees’ rate of pay exceeds 50%. Maximum credit: 25%, if employees receive 100% of their pay. Minimum leave: two weeks. Maximum leave: 12 weeks, or the regular FMLA entitlement.
The credit applies for 2018 and 2019. Catch: You can’t take the credit for paid leave provided to highly compensated employees; it applies only to employees who earned no more than $72,000 last year. This figure is adjusted for inflation.
NO DOUBLE DIPPING: This credit is part of the general business credit. If you take it, you can’t deduct the same wages as a salary expense. Unlike deductions, tax credits reduce your tax liability dollar-for-dollar. If the credit is worth more than the 21% corporate rate, taking it may pay off. But, you’ll have to run the numbers yourself to see which is more valuable.
Qualifications for paid leave. Employers covered under the FMLA qualify for the credit. In addition, employers not covered by the FMLA can qualify for the credit if their paid leave policy duplicates the FMLA: Paid leave is provided under a policy that ensures that they won’t interfere with, restrain or deny leave to qualified employees and that they won’t fire or discriminate against employees who take leave.
Employees qualify for paid FMLA leave if they’ve worked for you for one year. Part-time employees must be provided with a commensurate amount of leave on a prorated basis. Contrast: Employees qualify for regular, unpaid FMLA leave if they have worked for you for at least 12 months and for least 1,250 hours over the past 12 months.
Policy prescriptions. Employers covered by the FMLA must post notices. In addition to those notices, you’ll need a written policy that applies to paid FMLA leave. Beware: Other paid leave, including vacation leave, personal leave or other medical or sick leave, doesn’t count toward paid FMLA leave. Get ready: You may need to amend more than one company policy.
CHECK YOUR STATE/LOCAL LAW: You can’t take the credit if you’re located in a state or municipality that mandates paid leave or that—like California, Hawaii, New Jersey, New York and Rhode Island—have tax-supported disability plans. The chart below summarizes the coverage requirements for those laws.
Good news: If you’re located in a state or municipality that mandates paid leave, but fall under the employee threshold for coverage, you’ll probably be able to take the federal credit. But the IRS hasn’t yet addressed that issue.
Click the image to download.
