If you are familiar with FMLA for small businesses, you know that you may need to offer eligible employees up to 12 weeks of unpaid leave for qualifying situations. Federal law does not require you to offer employees paid FMLA. However, if you decide to pay employees for family and medical leave before 2020, you could be eligible to receive an FMLA tax credit.
Under the Tax Cuts and Jobs Act of 2017, employers can claim the Family and Medical Leave Act tax credit if they meet specific requirements. Read on to learn about FMLA tax credit rules and restrictions.
What is the FMLA tax credit?
The Family and Medical Leave Act tax credit is a tax liability reduction that eligible employers receive for paying wages to employees who are away on family and medical leave. The tax credit only applies for tax years 2018 and 2019, unless Congress renews it. To receive the credit, you must qualify.
Do you qualify for the FMLA tax credit?
Not all employers who offer paid leave can claim the FMLA tax credit. You must meet all five of the following IRS requirements to qualify.
1. You offer paid FMLA to all eligible employees
If you want to receive the FMLA tax credit, you must offer it to all eligible employees, including both full-time and part-time workers.
Under the Family and Medical Leave Act, employees become eligible for leave once they work for you for at least 12 months.
Eligible employees are also those who earn below an annual threshold. You can earn the FMLA tax credit for offering paid leave to employees who earned below $72,000 in 2017.
The employee’s leave of absence must be for a qualifying FMLA reason. The following types of leave count as FMLA:
- Birth, adoption placement, or foster care placement
- Care of a spouse, child, or parent with a serious health condition
- Serious health condition that prevents the employee from performing their job
- Situation that requires the employee’s attention due to the military deployment of a spouse, child, or parent
You cannot claim the FMLA tax credit for employees who use unpaid or paid time off from work for vacations or illnesses.
2. You pay at least 50% of the employee’s wages
To qualify for the tax credit, you must pay employees at least 50% of their regular wages while they are on family and medical leave.
For example, say your employee normally earns $1,000 per week. You would need to pay them at least $500 per week during their FMLA.
3. You provide at least two weeks of paid FMLA to full-time employees
You must offer all eligible, full-time employees at least two weeks of paid family and medical leave annually to qualify for the FMLA tax credit. Keep in mind that you may need to offer more, unpaid family and medical leave.
You can prorate the length of time you give to part-time employees, who are generally employees who work fewer than 30 hours per week.
4. Your state doesn’t require FMLA pay
Some states already require employers to provide paid family and medical leave to eligible employees. For example, the Washington paid family leave program requires employees, and qualifying employers, to pay into the system.
If your state requires you to pay employees for family and medical leave, you cannot claim the FMLA tax credit.
You may only claim the FMLA tax credit if you make the decision to offer paid family and medical leave.
5. You have a written policy in place
The IRS requires that you create a written, paid FMLA policy before the employee takes their paid leave of absence.
Your written policy must address things like how much time the employee can take as paid leave, what percentage of their wages they earn, and which workers are eligible for paid FMLA. And, be sure to include your policy’s effective date.
How much is the credit?
The credit you can claim for offering paid FMLA depends on the percentage of wages you provide.
The minimum tax credit you can take is 12.5%, and the maximum tax credit is 25%. The tax credit increases by 0.25% for each percentage point that exceeds 50%.
If you pay 50% of the employee’s normal wages when they are on family and medical leave, you can take a 12.5% tax credit.
You can take the maximum tax credit of 25% if you pay 100% of the employee’s wages when they take family and medical leave.
To help you determine your tax credit, use the chart below.
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This is not intended as legal advice; for more information, please click here.