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How to Earn the Paid Family and Medical Leave Tax Credit

Businesses that offer paid family and medical leave to full-time employees making less than $72,000 may be eligible to recover up to 25% of that expense thanks to a new tax credit. Will the initiative work?

This week, the IRS released guidance on the new tax credit for paid family and medical leave. Under the rule, introduced in 2017’s Tax Cuts and Jobs Act, employers that offer paid leave for family or medical reasons may be eligible for a tax credit proportional to the wages offered to employees during leave.

The credit is the first significant legislation on paid leave since 1993’s Family and Medical Leave Act (FMLA), from which this rule stems. It aims to incentivize businesses to offer lower-income employees paid leave. “By enhancing the benefits of this tax credit, we help empower working parents to pursue their careers while balancing their demands at home,” said the Treasury Department in September.

The paid family and medical leave tax credit is experimental for the time being, given that it will only be in effect for two years. But now that the details of this rule are finally published, businesses interested in exploiting this credit can start to plan how they’ll do so. Will the adoption of this tax credit take on enough to warrant a permanent extension?

Better yet, will it have any impact at all?

Background: The FMLA

In 1993, Congress passed the FMLA to require businesses to offer job-secure, unpaid leave for employees dealing with either family or personal issues. The law established criteria for which employers it applied to (generally, those employing 50 or more workers) and when exactly employees were entitled to leave — in the event of:

  1. The birth of a child
  2. Adoption or acceptance into foster care of a child
  3. Caring for a family member who has a serious health condition
  4. Addressing a serious personal health condition that hinders work
  5. Any emergency arising from the fact that a family member is on active duty in the Armed Forces
  6. Caring for a relative who is a service member in the Armed Forces

If and only if a circumstance on that list arose, employers were legally required to let employees attend to it, for up to 12 weeks a year. In their absence, the employer had to preserve the role, but they did not have to pay the employees.

In 2017, Nebraska Senator Deb Fischer took advantage of the tax bill negotiations to champion the Strong Families Act, a bill that would encourage companies to offer wages to employees on family and medical leave. The Act operated not through the force of law, but through tax incentives. When the TCJA passed, Fisher’s bill became law.

Requirements to earn the credit

Under the new Section 45S of the Internal Revenue Code, paying employees during family or medical leave can earn employers tax credits worth up to 25% of what they pay employees, for up to 12 weeks.

In order to qualify, employers must:

  • Put the paid leave policy in writing.
  • Compensate workers taking leave a minimum of 50% of their normal wages.
  • Not be required by local or state law to provide paid family or medical leave.

This last provision means that businesses in states with laws requiring paid leave — including California, New York, New Jersey, etc — cannot earn the credit. Meanwhile, businesses that are not covered by the FMLA (think smaller companies), yet offer paid leave, do in fact get to benefit from this credit.

As for the employees, not every worker’s paid leave is rewarded by this tax credit. Only paid family and medical leave offered to those making $72,000 or less (in 2018), who have worked for the employer for more than a year, are eligible for the credit. And again, their leave must be related to one of the six above circumstances defined by the FMLA.

How much is the credit worth?

That depends on how much the business pays eligible employees during family and medical leave.

The amount of the tax credit is a function of what percentage of the employee’s normal wages are provided during leave. The minimum tax credit is 12.5% of the employee’s leave-time wages, and it increases by 0.25% for each percentage point by which the amount paid exceeds 50% of the employee’s wages, with a maximum of 25%.

This table breaks out the math 1 for a qualified employee who normally makes $70,000 a year:

Percentage of Normal Wage Offered During Leave Family and Medical Leave Wage Per Week Tax Credit Rate 2 Tax Credit Amount Per Week
50% $692 12.50% $87
60% $831 15.00% $125
70% $969 17.50% $170
75% $1,038 18.75% $195
80% $1,108 20.00% $222
90% $1,246 22.50% $280
100% $1,385 25.00% $346

 

So if the employer offered this employee 75% of their salary for family and medical leave, and the employee took all 12 weeks entitled by the law, the employer would pay them a total of $12,456 in pre-tax wages and, later that year, get to claim a tax credit of $2,340.

Is the tax credit enough?

This rule intends to incentivize businesses that don’t otherwise have to offer anything, to pay their lower-wage workers during family and medical leave. The question is whether it’s generous enough to have the desired effect.

Congressional talking points aside, it remains to be seen how many real world businesses will be swayed by the chance to claw back up to 25% of 25% of a low-end salary during a worker’s absence.

The truth is, it’s hard to pay a worker while losing their labor input; you’re essentially doubling up expenses. Kudos to the employers who help people out during painful and dramatic events, but for many businesses, doing so is not economically possible. The tax incentive does not outweigh the added cost.

Aparna Mathur, an economic policy scholar at the American Enterprise Institute, told NPR that she’s skeptical the tax credit will have its desired effect. “Providing this benefit is a huge cost for employers,” she says. “It’s unlikely that any new companies will jump on board just because they have a 12.5% to 25% offset.” Others have spoken out with related concerns.

Regardless of what this particular initiative is able to accomplish before it sunsets in 13 months, paid leave for family and medical emergencies is supported widely across the political spectrum. It is the norm in almost every other developed nation. And if this tax credit is a small step towards a model of paid leave that makes sense, it could be the first step in a larger movement.

Additional resources: IRS FAQ, SHRM’s guide to FMLA tax credits, American Enterprise Institute’s study on paid family leave.

Notes:

  1. Rounded to the nearest whole.
  2. Tax credit rate = (((% of Wage Offered-0.5)*100)*0.0025)+0.125
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