In September 2018, the IRS issued Notice 2018-71 providing guidance on a lesser-known feature of the Tax Cuts and Jobs Act: the Section 45S Employer Credit for Paid Family and Medical Leave. Created as a way to incentivize businesses to continue paying employees who are out of work to care for family members, Section 45S offers employers a general business tax credit equal to a percentage of wages paid to qualifying employees on family and medical leave. Although the credit is currently available for only the 2018 and 2019 tax years, it may provide an attractive tax savings opportunity for organizations that already have a paid family and medical leave policy or those that are considering adopting one.
Qualifying for the Section 45S Credit
In order to claim the Section 45S Credit, employers must have a written paid family and medical leave policy in place that fulfills certain requirements. For example, the policy must:
- Cover all qualifying employees, defined as those who have worked for the employer for at least one year and who did not earn more than a specified amount in the preceding year. For employers claiming the credit for tax year 2018, qualifying employees must not have earned more than $72,000 in 2017 (not including overtime pay and bonuses).
- Provide at least two weeks of paid family and medical leave each year for qualifying full-time employees; paid leave may be prorated for part-time employees.
- Provide paid leave that is no less than 50 percent of the qualifying employee’s regular wages.
- If the organization has any qualifying employees who are not covered by Title I of the Family and Medical Leave Act (FMLA), the written policy must include “non-interference” protections.
The IRS has provided transition relief for 2018, stipulating that employers’ written leave policies will qualify for the Section 45S Credit as of the policy’s effective date (rather than the adoption date), as long as the policy was adopted no later than December 31, 2018.
Calculating the Employer Credit for Paid Family and Medical Leave
The Section 45S Credit is equal to a percentage of the wages paid to a qualifying employee while he or she is on family and medical leave, for up to 12 weeks per year. Organizations that pay employees 50 percent of their regular wages (the minimum amount required to qualify for the credit) will be eligible for a tax credit of 12.5 percent of wages paid. This credit amount increases by 0.25 percent for each additional percentage point by which family and medical leave wages exceed 50 percent of a qualifying employee’s regular wages. Therefore, organizations that pay qualifying employees at their regular rate of pay while on leave will be eligible for the maximum tax credit of 25 percent of wages paid.
In determining the amount of paid family and medical leave provided by the employer, any leave paid by a state or local government or required by law is not taken into account.
What constitutes “family and medical leave” for purposes of the credit?
Employees may take family and medical leave for a variety of reasons, including:
- The birth and subsequent care of the employee’s child;
- Placement of a child with the employee for foster care or adoption;
- The employee’s serious health condition that causes him or her to be unable to perform essential job duties;
- The need to care for the employee’s child, spouse or parent who has a serious medical condition;
- A qualifying exigency due to the employee’s spouse, child, or parent being an active duty member of the military;
- The need to care for a service member who is the employee’s child, spouse, parent, or other next of kin.
Any vacation, personal, or sick leave that the employer provides—other than for the reasons stated above—is not considered paid leave for purposes of the Section 45S Credit.
Offering employers a new opportunity to reduce their tax burdens while incentivizing paid family and medical leave, the Section 45S Credit serves as a multi-beneficial—albeit temporary—addition to the tax code. The credit may be claimed via Form 8994, Employer Credit for Paid Family and Medical Leave, and Form 3800, General Business Credit, both of which are filed with the employer’s income tax return. However, the Section 45S Credit may impact organizations’ tax savings through other wage-based business credits, so employers should work with their tax professionals to determine the proper strategy for maximum tax reduction.
Wondering whether your business may be eligible for tax savings through the Section 45S Credit or other incentives? The experts at Capital Review Group can help you reap the benefits of savings opportunities available through the Tax Cuts and Jobs Act and other tax laws. Contact CRG today to schedule a pro bono analysis!
(Sources: https://www.irs.gov/newsroom/section-45s-employer-credit-for-paid-family-and-medical-leave-faqs, https://www.journalofaccountancy.com/issues/2018/dec/tax-credit-paid-family-medical-leave.html).