3512 / What is the tax credit for employers that provides paid family and medical leave to employees?

The 2017 Tax Act created a new temporary tax credit for employers that provide paid family and medical leave to employees.¹ The credit is an amount equal to 12.5 percent of the wages that are paid to qualifying employees during a period where the employee was on family and medical leave if the employee is paid 50 percent of the normal wages that he or she would receive from the employer. The credit increases by 0.25 percentage points (but can never exceed 25 percent) for each percentage point by which the rate of payment exceeds 50 percent of wages.

For purposes of the 50 percent of wages requirement, overtime and discretionary bonuses are excluded from the wages that are normally paid. Wages paid by a third-party payor, such as an insurance company or professional employer organization, are taken into account if based on services provided by the employee to the eligible employer. Similarly, amounts paid under the employer’s short-term disability program are taken into account. The rate of pay does not have to be uniform.

Example: The employer provides six weeks paid leave for a qualifying employee for the birth or adoption of a child, at a rate of 100 percent of wages. The same employer provides two weeks of annual leave paid at a rate of 75 percent of wages for all other FMLA purposes. The policy satisfies the paid leave requirements. Note that the rate of pay cannot vary based on the employee’s classification (i.e., the employee cannot be paid leave offered only to employees not covered by a collective bargaining agreement).²

Only 12 weeks of family and medical leave can be taken into account for any one employee. Further, all part-time employees must be allowed a pro-rated amount of paid family and medical leave.³ Any leave paid for by the state or local government is not taken into account.⁴

In order to qualify, employers must have a written policy in place to allow all qualifying full-time employees no less than two weeks of paid family and medical leave each year. The written policy may be set forth in a single document, or in multiple documents that cover different classes of employee or different types of leave. The policy must be in place before the leave for which the employer claims the credit is taken, except as otherwise provided in a transition rule. A policy is considered to be “in place” at the later of its adoption date or effective date. Under the transition rule, the policy was considered “in place” as of its effective date, rather than a later adoption date, for the first tax year beginning after December 31, 2017 if the policy (a) was adopted before December 31, 2018 and (b) the employer complied with the terms of the policy for the entire retroactive period.⁵