Back on May 4th, the Internal Revenue Service (IRS) issued and posted a set of frequently asked questions regarding the employer tax credit through Section 45S under the 2017 Tax Cuts and Jobs Act, which applies to wages paid to employees between Jan. 1st of this year through December 31, 2019 and no later. Now that we are approaching the end of the year, companies who have exercised this policy or are planning to are in search of some guidance as they get ready to claim the credit.
Overview of the Tax Credit
This paid-leave tax credit was made available to employers who implement a provision to their written policies to claim a portion of the wages paid for qualifying employees of up to 12 weeks of family and medical leave annually per taxable year. Family and medical leave constitutes leaving for one of the following reasons: birth, adoption, or foster care of a child; caring for a family member with a serious health condition; caring for your own serious health condition that precludes you from performing the functions of your job; a qualifying event for a family member or yourself being called to active duty in the Armed Forces; or caring for a service member who is a family member or next of kin. However, there are some stringent criteria for meeting the tax credit requirement:
- The employer has to make at least two weeks of leave available and must compensate their workers a minimum of 50 percent of their regular earnings. The tax credit ranges from 12.5 percent to 25 percent of the cost of each hour of paid leave, depending on how much of the employee’s regular earnings the benefit replaces. The government covers 12.5 percent of the benefit’s costs if workers receive half of their regular earnings, rising incrementally up to 25 percent if workers receive their entire standard earnings.
- The employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit for paid FMLA leave, and any other general business credit may not be used or taken into account when determining this credit.
- There is a stipulation under the Fair Labor Standards Act that employers can only apply the credit towards workers who earn below $72,000 per year, and must have been employed with the company for a minimum of one year to qualify.
Jamie Weyeneth and Ruth Wimer, partners at multiple locations of the law firm Winston & Strawn, have provided a written example outlining if an employer pays $50,000 in wages, including $5,000 of paid FMLA leave for which the employer received a $1,250 credit, that the employer may deduct only $48,750 of the wage expense.
Warnings and Considerations
Weyeneth and Wimer warn that the issued FAQs “offer little in the way of new guidance,” and “. . .employers are left to interpret the tax code text describing the credit.” For example, many areas of the tax provision are vague and the IRS claims it will address them at a later date, including a set timeline for when the written leave policy must be put into place, how paid family and medical leave relate to other types of paid leave, the gray area of how state and local laws impact leave requirements, as well as whether members of a group of corporations and businesses under common control are considered as a single taxpayer or multiple when determining the tax credit.
According to Julie Pugh, a labor and employment attorney with Graydon in Cincinnati, Ohio, while the provision incorporates FMLA definitions, it does not “tie the tax credit to covered employers as defined by the FMLA.” She also points out a catch where though the employer is required to provide at least two weeks of paid leave for family and medical leave, the two weeks cannot be taken as vacation, personal, medical or sick leave. This can leave employers planning on offering said paid leave quite confused.
Megan Holstein, a principal attorney at Jackson Lewis P.C. in Denver, Colorado, advises employers to review various corporate policies in existence before offering paid family leave in general, such as those that include voluntary paid-leave benefits not required by law, like salary-continuation disability or parental-leave policies. She also suggests that companies determine if paid time off is already offered for reasons and conditions outlined in the tax credit, and if so, calculate how much was used to pay out under one or all of those policies in 2017. This could be a good place to start when estimating the tax credit and assessing the potential annual savings. However, Holstein warns that once you calculate this number, you should consult counsel to make sure that your policy complies with Section 45S under the 2017 Tax Cuts and Jobs Act.