What to Know About the Paid Leave Tax Credit

Date: October 12, 2019

A new employer credit will allow tax relief for eligible businesses that provide paid family and medical leave.

While no federal mandate exists requiring U.S. businesses to offer paid leave, many business owners choose to provide employees the flexibility to take time off to care for themselves and their family. Under a provision of the 2017 Tax Cuts and Jobs Act, small business owners have the opportunity to take care of themselves as well by receiving a tax credit for providing paid leave to their employees.

The new employer credit for family and medical leave allows eligible business owners to help their employees while reducing the taxes businesses owe for tax years 2018 and 2019.

“As much as smaller businesses want to offer paid family and medical leave—and many do to compete for qualified employees—certain small businesses have been unable to do so,” says Kevin Kuhlman, NFIB’s Senior Director of Federal Government Relations. “This tax credit provides further incentive to do that.”

Per the Family and Medical Leave Act (FMLA), businesses with 50 or more employees are required to grant up to 12 weeks of unpaid employee leave in a 12-month period under certain circumstances. However, businesses with fewer than 50 employees are not covered by the law.

To learn if your business is eligible, below is a breakdown of who qualifies for the tax credit.

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Business Qualifications

To claim the tax credit, business owners must have a written policy in place that meets certain requirements, including:

  • At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part time).
  • The paid leave is not less than 50 percent of the wages normally paid to the employee.

If a state requires a business to provide paid family and medical leave, that business will not be eligible for the tax credit.

Employees’ Qualifications

In addition to the written policy, employees must have been employed for at least a year to qualify and are eligible if they take leave for any of the reasons listed in the FMLA, such as:

  • Birth of a 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.

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Calculating and Claiming the Credit

Business owners can claim the tax credit for qualified employees who earn up to a certain amount, as long as owners provide at least two weeks of paid family and medical leave to full-time employees. For tax year 2018, employers can apply the credit only toward employees who were paid no more than $72,000 by the employer in 2017.

The pay provided during leave must be at least 50 percent of an employee’s usual wages. Employers also need to provide a prorated amount of leave to part-time employees. Business owners must have a written paid-leave policy that covers all qualified employees.

The tax credit is generally equal to 12.5 to 25 percent of the leave paid to the employee. To claim the credit, employers will file two forms with their tax returns. These are Form 8994, Credit for Paid Family and Medical Leave, and Form 3800, General Business Credit.

While there is legislation to extend the credit, Congress has not yet acted. For more details on the tax credit, contact a trusted tax professional and see the IRS guide to frequently asked questions.

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