January 2, 2019
Mazars USA LLP
The Tax Cuts and Jobs Act (TCJA) introduced IRC Section 45S which created the Employer Credit for Family and Medical Leave. The credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017, and it is not available for wages paid in taxable years beginning after December 31, 2019. The IRS recently issued Notice 2018-71 to provide additional guidance with respect to the Section 45S Employer Credit for Family and Medical Leave.
Section 45S provides a general business credit for employers that provide paid family and medical leave to qualifying employees, equal to a percentage of the wages paid during that leave. The Notice defined a qualifying employee as an employee whose 2017 compensation was less than $72,000 (the compensation level for a specific year is based on the prior year’s compensation); the paid leave must be for one or more of the qualifying Family and Medical Leave Act ( FMLA) purposes, and any leave paid by a state or local government, or required by a state or local government, is not taken into account in determining the amount paid. The Notice clarified wages qualifying for the credit have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA) pursuant to section 3306(b), determined without regard to the $7,000 FUTA wage limitation.
In order to qualify for the credit, the employer’s paid leave policy must:
• Provide at least 2 weeks paid family and medical leave to all employees;
• Pay at least a rate of 50% of the employee’s normal wages; and
• Cover all qualifying employees who were employed for a year or more and not paid more than the specified amount.
For employees not covered by Title 1 of the FMLA, the employer’s paid leave policy must:
• Include language providing “non-interference” protections;
• Be in place before the paid family and medical leave for which the employer claims the credit;
• Indicate that the leave be for one or more of the FMLA purposes and may not be used for any other reason;
• Not be paid by a state or local government or required by law; and
• State that a part-time employee is employed for less than 30 hours.
The Notice defined the FMLA purposes for which paid family and medical leave under section 45S may be provided are:
• The birth of a son or daughter of the employee and be in order to care for the son or daughter;
• The placement of a son or daughter with the employee for adoption or foster care;
• Caring for the spouse, son, daughter, or parent of the employee, if the spouse, son, daughter, or parent has a serious health condition;
• A serious health condition that makes the employee unable to perform the functions of the employee’s position;
• Any qualifying exigency arising out of the fact that the spouse, son, daughter, or parent of the employee is a member of the Armed Forces who is on covered active duty; and
• Caring for a covered service member with a serious injury or illness if the employee is the spouse, son, daughter, parent or next of kin of the service member.
The credit is an amount equal to the applicable percentage of wages paid to qualifying employees during any period in which the employees are on family and medical leave. Under section 45S(a)(2), the term “applicable percentage” means 12.5% increased by 0.25% points for each percentage point by which the rate of payment exceeds 50%, limited to 25%. Under section 45S(b)(3), the amount of family and medical leave that may be taken into account with respect to any qualifying employee for any taxable year may not exceed 12 weeks.
For example, an employer’s written policy provides each qualifying employee with four weeks of annual paid family and medical leave at a rate of payment of 75% of the wages normally paid:
• 12.5% + (.25%*25)
• 12.5% + 6.25%
In this example, the employer would be eligible for an 18.75% credit for wages paid to employees while on family and medical leave.
Section 280C denies a deduction for wages or salaries paid for the taxable year equal to the amount of the credit.
Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.