When the Tax Cuts and Jobs Act (TCJA) was first announced, many components of it were poorly understood, including the paid-leave tax credit that was ushered in as part of the bill. Now, the Internal Revenue Service (IRS) has stepped up to the plate to answer questions and debunk myths.
The biggest takeaway? Some firms feeling short-changed.
Here’s how the measure was initially explained: the tax credit was designed to help employers that provide leave in accordance with the federal Family and Medical Leave Act (FMLA). To be eligible for the credit, employees must be paid at least 50 percent of their normal wages while out on leave and cannot make more than $72,000. The tax credit applies to any wages paid between January 1 of this year and December 31, 2019, unless Congress decides to extend it.
Now, in terms of how employers benefit, they were eligible for a tax credit of between 12.5 percent and 25 percent of the amount of wages paid out, with the scale sliding based on what percentage of their normal wages the employee was eligible to receive. However, it should be noted that companies are not eligible if the leave is mandated by their state or local law.
The FAQ from the IRS essentially irons out what constitutes paid family and medical leave under the terms of the tax credit program. Per the federal agency, this leave applies to employees who take leave for the following reasons:
- Birth of an employee’s child and to care for the child.
- Placement of a child with the employee for adoption or foster care.
- To care for the employee’s spouse, child, or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
Further, the IRS gave a bit more direction as to how the credit should be calculated, but if we’re being honest, it’s about as clear as mud! Specifically, they state that “The minimum percentage [for tax credit] is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%. In certain cases, an additional limit may apply.”
Lucky for us, HR Morning tracked down the fine folks over at the law firm Winston & Strawn, and they did the heavy lifting! Their example profiles an employee who earned $50,000, which included $5,000 of paid FMLA leave. They noted that in this case, the employer received a $1,250 credit for the leave it provided, therefore, it could only deduct $48,750 of the employee’s wage expense ($50,000-$1,250).
Still have questions? Yep, even the IRS predicted that one! They even note in their FAQ that future updates will focus on “when the written policy must be in place, how paid “family and medical leave” relates to an employer’s other paid leave, how to determine whether an employee has been employed for “one year or more,” the impact of State and local leave requirements, and whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.”
Phew – so that’s a ton of information, and not necessarily a lot of concrete answers. Lucky for you, our experts stay on top of these updates and will be sure to keep you posted on all tax credits for which your company may be eligible. We are available at (800) 400-1968 or firstname.lastname@example.org to answer any questions and make sure you are getting the tax credits you are qualified to receive.