If your business offers paid family and medical leave to your employees, a new business credit may apply! Beginning after December 31, 2017, a credit is available for up to 25% of wages paid for family and medical leave for qualifying employees. See below for an explanation of the details of the credit.
Qualifying Employer: the employer must have a written policy that provides all qualifying employees at least two weeks of annual paid FMLA leave (prorated for part-time employees). The leave policy must provide payment of at least 50% of normal wages.
Qualifying Family and Medical Leave: birth of employee’s child, placement of child for adoption or foster care, care for employee’s spouse/child/parents with serious health condition, serious personal health condition, qualifying exigency due to employee’s spouse/child/parent being on active duty in Armed Forces, and care for a service member who is the employee’s spouse/child/parent/next of kin.
Qualifying Employee: employee that is employed for at least one year or more and has not earned more than $72,000 of compensation in 2017 to take the credit in 2018 ($72,000 for 2019 credit as well). 12 consecutive months are not required, as the employer must use any reasonable method to determine length of employment.
Credit: 12.5% of wages paid during leave period if employee is paid at least 50% of normal pay during the leave period. The credit increases by 0.25% for each percentage point the rate of payment for the leave period is over 50% for a maximum of 25%.
Leave Period: Credit applies to no more than 12 weeks of family and medical leave
For example, Company ABC has a qualifying written policy in place for medical leave. Employee A is normally paid $25/hr. Employee A has a baby and will be on leave for 8 weeks receiving 75% of her normal pay or $18.75 ($25 x 75%).
The employer will receive a credit of $1,125 thus reducing salaries and wage expense by the credit.
- Salaries and wage deduction on Page 1 of the tax return will be reduced by the amount of credit, as seen with the Hurricane Irma (employee retention credit).
- Any leave paid by state or local government or required by state or local law is not considered in this calculation.
- If an employee is not covered by title I of the FMLA (works less than 1,250 hours), the written policy must include noninterference language.
- The employee must be a qualifying employee before the medical leave begins. They do not qualify if the leave is taken and then only after becomes a qualifying employee.
- If an employee is paid salary, his/her wages are prorated to an hourly wage rate for the credit calculation.
- A policy is treated as in place on the retroactive effective date if the policy is adopted on or before December 31, 2018.
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