IRS FAQs Provide Guidance About the Paid Family and Medical Leave Tax Credit

The IRS has issued FAQs that provide guidance to employers on the Paid Family and Medical Leave Tax Credit which was created by the Tax Cuts and Jobs Act of 2017.

Background. The FMLA Tax Credit, as provided under Internal Revenue Code Section 45S, enables eligible employers to claim a general business tax credit of up to 25 percent of the wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions.

FAQs. Among other things, the FAQs provide the following information about the FMLA Tax Credit:

• Eligible Employer. To qualify for the FMLA Tax Credit, the employer must have adopted a written leave policy that meets certain requirements, including:
  1. provision of 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); and
  2. paid leave that is not less than 50 percent of the wages normally paid to employees.
• Qualifying Employee. A qualifying employee is any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain amount. For an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017.
• Family and Medical Leave. The FAQs clarify that, for purposes of the FMLA Tax Credit, “family and medical leave” is leave for one or more of the following reasons:
  1. Birth of an employee’s child and to care for the child.
  2. Placement of a child with the employee for adoption or foster care.
  3. To care for the employee’s spouse, child, or parent who has a serious health condition.
  4. A serious health condition that makes the employee unable to perform the functions of his or her position.
  5. 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.
  6. To care for a service member who is the employee’s spouse, child, parent, or next of kin.

One difference between the rules for the tax credit and for FMLA leave in general is that, if an employer provides paid vacation leave, personal leave, or medical or sick leave (other than paid leave specifically for one or more of the purposes stated above), that paid leave is not considered family and medical leave for purposes of the tax credit. Moreover, any leave paid by a state or local government or required by state or local law will not be taken into account in determining the amount of the tax credit.

• Effective Date. The FMLA Tax Credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017. It is not available for wages paid in taxable years beginning after December 31, 2019.

• Impact on Eligible Employer’s Other Deductions and Credits. An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Also, any wages taken into account in determining any other general business credit may not be used in determining this credit.

The IRS intends to release additional FAQs concerning the FMLA Tax Credit to address the following issues:

• When the written leave policy must be in place.
• How paid family and medical leave relates to an employer’s other paid leave.
• How to determine whether an employee has been employed for one year or more.
• The impact of state and local leave requirements.
• Whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.

The FAQs are available by clicking here.