A new tax credit, signed into law as part of the 2017 Tax Cuts and Job Act, takes effect this year and continues through the 2019 tax year (with the possibility of an additional extension). It affects those employers who set up qualifying paid family leave programs, or make amendments to existing ones, prior to December 31, 2018. Should these criteria apply to your practice, you will be able to retroactively claim the credit from the beginning of your 2018 tax year.
Detailed information can be found in Notice 2018-71, but we’ll share with you the basics below.
Determining Employer Eligibility
Any employer that voluntarily offers qualifying employees 12 weeks of paid family and medical leave on an annual basis, as established in a written policy, is eligible to claim a tax credit for a portion of wages paid during the leave, per Section 45S of the Internal Revenue Service. For the 2018 tax year, guidelines allow you to apply the credit toward employees earning less than $72,000 in 2017.
There are a couple of stipulations to keep in mind. In order to receive the credit, you must offer a minimum of two weeks’ paid time off (PTO) that would otherwise go unpaid under the Family Medical Leave Act (FMLA) to any employees taking leave. There is more information in Section 45S pertaining to leave eligibility, but this tax credit applies to all employers – not just those who are covered by the FMLA. And you must compensate your employees a minimum of 50 percent of their regular earnings while on leave. At this rate, the government will reimburse 12.5 percent of your benefit costs. The number rises incrementally, as high as 25 percent if you pay employees for leave their full wages.
An exception to the rule occurs if paid leave is mandated by state or local law. In this case, the government will not cover the costs.
Additional information on how to calculate the credit under different scenarios is available in Notice 2018-71, which we linked to above. Some of the situations you might need help with include:
- Leave that is paid by a third-party
- Your practice is part of a controlled group of corporations
- FMLA leave that does not require the employer to offer PTO
Keep in mind that all deductions can be taken retroactively as long as your policies are amended to match the requirements of Code Section 45S by the last day of the year.