Paid Family Medical Leave Tax Credit

Do you provide paid family and medical leave to your employees?

Employers who provide paid family and medical leave to qualifying employees may claim a federal tax credit for tax years 2018 and 2019. To be eligible for the credit, they must have a written policy in place that meets certain requirements to claim the credit. Requirements include:

  • Full-time employees receive at least 2 weeks of paid leave annually (pro-rated for part-time employees), and
  • Employee receives paid leave at least 50% of their standard pay

What is the Employer Credit for Paid Family and Medical Leave?

It is a business credit, that is based on a percentage of wages that an employer paid to qualifying employees while they were on family and medical leave.

Paid Family and Medical LeaveWhat qualifies as family and medical leave?

Family and medical leave is for one or more of these 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;
  • Care for the employee’s spouse, child or parent with a serious health condition;
  • Serious health condition that makes the employee unable to do the functions of his/her position;
  • Qualified need 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; and
  • Care for a service member who’s the employee’s spouse, child, parent or next of kin.

What does not qualify as family and medical leave?

  • Employer paid vacation leave, personal leave, or medical or sick leave (other than leave specifically designated for one or more purposes stated above)
  • Employers may not consider any leave paid by a state or local government or required by state or local law when determining employer-provided paid family and medical leave.

Who qualifies?

  •  Any employee under the Fair Labor Standards Act employed by the employer for one year or more and who, in the preceding work year, didn’t have compensation over $72,000.

When does the credit apply?

An employer can claim the credit for leave taken after the written leave policy is in place, which is considered in place on the later of the policy’s adoption date or the policy’s effective date. A transition rule applies for the first taxable year of an employer beginning after Dec. 31, 2017.

How is the credit determined?

The credit is a percentage of the wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.

The percentage is equal to 12.5% and increases by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages. The maximum applicable percentage is 25%. In certain cases, an additional limit may apply.

An employer will reduce wages paid or incurred equal to the amount claimed as a credit. Also, the employer may not use wages considered in determining other business credits when calculating this credit.

How do I calculate my credit?

Eligible employers should use Form 8994, Employer Credit for Paid Family and Medical Leave.

For more information please see IRS Publication 5327, or contact us at 401-331-0200.