As a closely held business, retaining quality employees is often key to sustainable success. With historically low unemployment rates, employers are being required to offer more flexibility and incentives. One of the less publicized provisions of the Tax Cuts and Jobs Act of 2017 is the new family and medical leave credit which incentivizes employers to offer paid family and medical leave to their employees. Employers may claim the credit beginning in tax years after December 31, 2017. The credit is not applicable to wages paid in tax years beginning after December 31, 2019. The term “family and medical leave” means leave for any one or more of the purposes defined under the Family and Medical Leave Act of 1993, as amended.
The credit is available to employers that have a written policy in place that allows:
- All qualifying full-time employees at least two weeks annual paid family and medical leave, and
- Allows part-time employees a commensurate amount of leave on a prorated basis.
The maximum amount of leave subject to the credit is 12 weeks and is based on the employee’s hourly wage rate. For non-hourly wage rate employees, the wages shall be prorated to an hourly wage rate under the regulations established by the Secretary of Treasury. The credit is equal to 12.5% of the wages paid to qualifying employees as long as the employee is getting paid at least 50% of normal pay. The credit increases by .25% (but not to go above 25%) for each percentage point by which the rate of payment exceeds 50%.
An eligible employee must:
- Have been employed by the employer for one year or more, and
- For the preceding year, had compensation not in excess of an amount equal to 60% of the amount applicable for that year under the income threshold used in determining who is a highly compensated employee for purposes of the retirement plan antidiscrimination rules. So for 2018, an employee must have compensation that is less than 60% of $120,000, or $72,000.
Jane is a full-time employee of ABC Corporation. Her annual salary for 2018 is $50,000. She goes on paid maternity leave for 12 weeks. The company policy sets leave wage replacement at 70% of a worker’s normal wages.
|To prorate Jane’s wages||$50,000 / 52 weeks x 12 weeks x 70% = $8,077|
|Normal credit rate of 12.5%||12.5% x $8,077 = $1,010|
|Increase .25% by which percentage of pay exceeds 50%||.25% x (70 – 50) = 5%|
|5% x $8,077 = $404|
|Total amount of credit||$1,010 + $404 = $1,414|
|ABC Corporation will get a $1,414 tax credit for the 2018 tax year. ABC Corporation’s wage expense deduction will be reduced by $1, 414.|
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Please contact your Elliott Davis advisor if you have any questions about the credit and the potential impact it could have on your company.