The 2017 Tax Cuts and Jobs Act includes a tax credit for businesses that provide family leave benefits to employees. This tax credit is directed toward small businesses that aren't required to have a Family Medical Leave Act (FMLA) policy, to give these businesses an incentive to pay benefits to employees for family leaves.
Leave Tax Credit Expanded for Coronavirus
This family leave tax credit has been expanded with an increase in required paid family leave and a new tax credit to employers who provide paid leave to employees for child care during the coronavirus epidemic. A comparable credit is available to self-employed individuals.
The family leave benefit is for employees who are unable to work (including telework) because they need to care for a child whose school or place of care has been closed or child care isn't available due to COViD-19 precautions. The leave benefit is for up to two weeks of regular pay, up to $200 a day, and a total of $2,000.
The leave must be for the care of a child under age 18 at home due to a school closure or unavailability of a child care provider, due to a the COVID-19 disaster.
The tax credit for the employer is the amount of the employee's leave payments, plus the employer's share of Medicare tax on those wages, and the cost of health insurance coverage for the employee during the leave period. In addition, the employer portion of the Social Security tax (part of FICA taxes) on those wages is forgiven.
Read more about this program in this article about Tax Credits for Employers for Coronavirus Paid Sick Leave Benefits. Also, the IRS has a flow chart to help you figure out the new Employee Retention Tax Credit and the Sick Leave/Family Leave Tax Credits.
What Is the Paid Family Medical Leave Tax Credit?
The credit is a general business tax credit available to businesses that provide paid family medical leave for employees.
The general descriptions of the eligibility and requirements of the family leave tax credit detailed below may be different from the specific provisions of the Paid Family Leave Tax Credit under the recent coronavirus stimulus legislation. For example, no policy document is required for the Coronavirus Paid Family Leave tax credit.
To receive the tax credit, your business must:
- Have a written policy describing family leave benefits
- The policy must include at least two weeks of paid family medical leave each year for "qualifying employees" who are full-time (pro-rated for part-time employees).
- The amount of the payment must be a minimum of 50% of the wages normally paid to the employee.
Other limitations and restrictions of the policy include:
- The two weeks of paid leave under this plan cannot be provided as vacation, personal, medical, or sick leave.
- Your business can't use your current paid time off (PTO) policies for this tax credit.
Medical Leave Tax Credit vs. FMLA for Larger Employers
Don't confuse this tax credit with the Family Medical Leave Act (FMLA) benefits legally required for larger businesses. The FMLA requires businesses with 50 employees or more to grant eligible employees up to 12 weeks of unpaid leave for specific types of family leave. This law does not require employers to provide paid leave, and employees can use any sick time, vacation time, or other paid time off during the leave.
What Types of Leave are Covered?
For purposes of this tax credit, “family and medical leave" is leave for one or more of the following reasons:
- Birth of an employee’s child and to care for the newborn.
- 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 event due to an employee’s spouse, child, or parent being on covered active duty––or being called to duty––in the Armed Forces.
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
What Is a Qualifying Employee?
A qualifying employee is an employee who has been employed for one year or more. In addition, employee compensation in the previous year cannot exceed a certain amount. For 2020, the employee must have earned no more than $75,000 in 2019.
As an example, if you have one full-time employee who has been employed for at least a year, who was paid less than $75,000 in 2019, and you paid this employee at least half of the employee's normal pay for at least two weeks of family leave, you can apply for the tax credit in 2020.
How Much Is the Tax Credit?
The IRS says that the tax credit amount is a percentage of the wages paid to a qualifying employee while on family and medical leave. The tax credit is payable for up to 12 weeks of paid leave benefits in a tax year. The minimum percentage is 12.5% and is increased by 0.25% or 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, additional limitations may apply.
Taking the example above, let's say an employee is on family leave for four weeks and you paid the employee $1,000 in family leave payments for that time period, which is 50% of the employee's wages. Since the payments aren't over 50% of the employee's wages, no tax credit is available.
But, if the payments are $1,500 (75% of the employee's wages for that four-week period), the tax credit would be calculated in this way:
- Take the amount that exceeds the 50% ($1500-$1000) = $500.
- Multiply that by 25% (the maximum percentage).
- The result is $125 in tax credit.
There is one more restriction. An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. In the case above, for example, your business can't take a tax deduction for the $500 in wages paid that were used to determine the tax credit.
Also, any wages taken into account in determining any other general business credit may not be used in determining this credit.
How Does My Business Get This Tax Credit?
First, you must have a written leave policy in place.
Second, collect information on the amounts you have paid for family leave for employees. Include information on the total pay for each employee for the year.
Third, use Form 8994 Employer Credit for Paid Family and Medical Leave to calculate the amount of the tax credit and include this information on your business tax return.
What is an Acceptable Policy?
Your business doesn't need to be subject to the Family Medical Leave Act in order to be eligible for this tax credit. Your business just needs an acceptable policy. Some requirements
- Your business must have a policy in place (with either an adoption date or an effective date) before the paid leave process begins.
- The policy must cover all qualifying employees (those employed a year or more and paid less than a specific amount for the prior year,
- Provide paid family and medical leave for at least two weeks (prorated for part-time employees).
- The payments for leave time must be at least 50% of the employee's normal wages.
- If you have at least one qualifying employee who is not covered by Title I of the FMLA, you must include "non-interference" language in your policy.
The IRS has suggested language for a "non-interference" policy: The employer cannot interfere with, restrain, or deny employees their rights under the policy. In addition, employers can't retaliate against or discriminate against anyone for opposing any practice prohibited by the policy.