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 may not be required to have a Family Medical Leave Act (FMLA) policy, to give these businesses an incentive to pay employees who must take family leaves.
This article discusses how a business can get a tax credit for giving paid family leave to employees, including credits for COVID-related leaves.
- Businesses with 500 or fewer employees can receive tax credits to cover costs of paid sick leave and family leave to employees.
- The tax credit program has been expanded to include COVID-related situations, through September 30, 2021.
- Paid sick leave and family medical leaves must meet specific requirements, including minimum payments, qualifying employees, maximum leave times, and written policies.
- When COVID-related provisions expire, the original tax credit program will still be available to small businesses that provide paid family leave to employees.
Paid Family Leave Tax Credit Expanded in 2020
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.
The paid 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 pandemic 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 the ongoing public health and economic crisis.
The 2021 American Rescue Plan extends 2020 tax credits through September 30, 2021.
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.
What Is the Paid Family Medical Leave Tax Credit?
The credit is a general business tax credit available to employers 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 updated tax credit.
To receive the tax credit, your business must meet these requirements:
- Your company 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.
Types of Leaves
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 their 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
Through September 30, 2021, pandemic-related provisions allow tax credits for paid sick leave or family leave for illness, quarantine, getting tested or vaccinated, or caregiving.
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 2021, the employee must have earned no more than $78,000 in 2020.
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 2020, 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 2021.
How Much Is the Tax Credit?
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.
Family Leave Tax Credits vs. FMLA at a Glance
Don't confuse this tax credit with the Family Medical Leave Act (FMLA) benefits legally required for larger businesses. Here's a comparison:
|Family Leave Tax Credit||FMLA|
|Laws||TCJA, plus COVID-related legislation||FMLA|
|Number of employees||under 500||50 or more|
|Tax credit available?||Yes, if qualifications are met||No|
|Paid leave?||Required for a tax credit||Pay for leave is not required|
|Policy required?||Yes, for non-COVID reasons||Yes|
|Job protection provisions?||No||Yes|
|Available to self-employed individuals?||Some COVID-related provisions||No|
The FMLA's purpose is to protect employees while they are on leave to care for family members or take time off for illness or injury. It's not designed to pay employees for this time beyond what they may receive as sick pay and other benefits. Employees have the right to return to work in the same or similar situation as when they left if they return in a timely manner with proper documentation.
In contrast, paid family leave tax credits are an incentive for smaller employers to pay employees for absences due to family sickness and other medical situations.
An employer with more than 50 employees and fewer than 500 employees may be subject to FMLA requirements and also receive a tax credit for paying employees under the TCJA paid family leave tax credit program.
Frequently Asked Questions (FAQs)
Who pays for paid family leave?
Employers may continue to pay their employees, in full or in part, while they take approved leaves of absence for their own illness or injury or for family medical issues. The FMLA doesn't require employers to pay employees for these leaves.
If the employer wants a tax credit for paying for approved leaves, they must follow the requirements of the paid family medical leave regulations set out by the IRS.
How do you apply for family leave?
An employee who wants to apply for sick leave or family medical leave should check with their company's human resources department to get the eligibility requirements. The employee should write an application letter that includes
- Dates for the requested leave
- Reason for the leave
- A statement that you are unable to work because of the above reason
If the business has 50+ employees, it must give employees information on how to apply and the requirements for being eligible to apply for this leave.
How long is paid family leave?
The length of an individual's leave depends on the individual situation. If an employer wants to give paid family leave to employees, they can set their own maximum amount and length of time. The maximum time for the tax credit is 12 weeks per employee per year and the total amount paid can't be more than a specific amount that changes every year.
IRS. "COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs." Accessed August 4, 2021.
IRS. "Section 455 Employer Credit for Paid Family and Medical Leave FAQs." Accessed August 4, 2021.
IRS. "Instructions for Form 8994. Employer Credit for Paid Family and Medical Leave." Page 2. Accessed August 4, 2021.
Journal of Accountancy. "New tax credit for paid family and medical leave." Accessed Aug. 4, 2021.
IRS. "Employers may claim tax credit for providing paid family and medical leave to employees." Accessed August 2, 2021.
U.S. Department of Labor. "Employer's Guide to the Family and Medical Leave Act." Page 65. Accessed August 4, 2021.
U.S. Department of Labor. "Families First coronavirus Response Act: Questions and Answers." #16. Accessed August 4, 2021.
IRS. "Employer Tax Credit for Paid Family and Medical Leave." Page 1. Accessed August 4, 2021.