Employer Tax Credit for Paid Family and Medical Leave

As a small business owner, there’s a lot to manage and frankly, it can be daunting. 

The Family and Medical Leave Act (FMLA) and all the rules surrounding it can be particularly overwhelming. As a quick overview, under the FMLA most businesses employing at least 50 people are required to offer eligible employees up to 12 weeks of unpaid leave for qualifying situations. The law does not require employers to offer paid FMLA. However, businesses that decide to pay employees for family and medical leave through the end of 2019 could be eligible to receive an employer tax credit.

IRS Code Section 45S – Employer Tax Credit

This tax credit was enacted to help businesses reduce their taxes while employees are on paid leave. It applies to the 2018 and 2019 tax years. Employers are eligible for the tax credit if they pay qualifying employees a minimum of 50% of their normal salary while on family and medical leave for up to twelve weeks.

A qualifying employee is anyone who has been employed for a minimum of twelve months and earned a salary that did not exceed a certain amount in the previous year. For 2018, this amount is $72,000.

Who is Eligible to Claim the Tax Credit

To be eligible to claim the tax credit, employers must have a written policy providing at least two weeks of annual paid family and medical leave to all full-time employees. This can be prorated for part-time employees. The paid leave cannot be less than 50% of the employee’s regular wages.

How the Tax Credit is Calculated

The credit is a percentage based on wages paid to an eligible employee while on family and medical leave for up to 12 weeks per year. The tax credit starts at 12.5% and has a maximum of 25%. For every percentage point over 50% of the employee’s wages that an employer pays, the credit increases by 0.25%. 

Employers may not claim the family and medical leave credit and other types of general business credits for the same wages. The total amount of any claimed deductions for wages and salaries paid during the year will be reduced by the amount of the family and medical leave credit.

Anticipating that many employers would have questions about the tax credit, the IRS published a guide with many helpful FAQs. Check it out, and please feel free to contact us if you have additional questions or would like help claiming the credit. We’re happy to help!