Eligible businesses offering employees paid family and medical leave could take advantage of a new tax credit next filing season, according to an IRS press release.
The new Section 45S employer credit for paid family and medical leave is part of the sweeping Tax Cuts and Jobs Act changes. The agency notes that tax professionals looking for more information on the new employer credit can review Notice 2018-71, which “clarifies how to calculate the credit, including the application of special rules and limitations.”
Which employers are eligible?
While the question-and-answer format covers seven different topics related to eligibility, the notice generally states that eligibility is predicated on establishing a written paid family- and medical-leave policy that covers events like the birth of a child, providing care for family members, and medical conditions that prevent an employee from working (3, 4, 8). At minimum, the policy must provide two weeks of leave that pay “no less than” half of what the employee normally makes (11).
How is it calculated?
The employer credit is calculated as a percentage of the paid leave wages and limited by the employee’s prior-year compensation: For example, the tax year 2018 credit would be limited to employees making “no more than $72,000” (1-2). Starting at 12.5%, the credit increases by a quarter of a percent for each percentage above the 50% minimum—capping at 25% (19). Below is an example from Notice 2018-71:
"Example 1. Facts: 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 percent of the wages normally paid to the employee.
Conclusion: Because the rate of payment under the policy exceeds 50 percent by 25 percentage points, the base applicable percentage of 12.5 percent is increased by 6.25 percent (.25 percent multiplied by 25), for an applicable percentage of 18.75 percent.
Applicable Percentage = 12.5 percent + (0.25 percent x 25)
[Applicable Percentage] = 12.5 percent + 6.25 percent
[Applicable Percentage] = 18.75 percent"
Thirteen questions are dedicated to explaining the calculation, including what constitutes wages for the purpose of the credit and whether third-party and state-paid leave are into account (22-26).
Where do I learn more?
The IRS recommends visiting “Tax Reform” on IRS.gov for more information on changes arising from the Tax Cuts and Jobs Act.