A few years ago, the IRS made some changes to the tax credit employers receive for giving employees paid family or medical leave. The IRS code section 45S will be in effect until the end of this year, though it’s possible that Congress could decide to extend it beyond December 31, 2019.
For employers, it means that offering that added benefit to your employees comes with a tax perk.
What must I do to claim the credit?
The first thing you need is a written policy for your employees. This policy must include at least two weeks of paid family or medical leave annually for all full-time employees. The leave will be prorated for part-time employees.
This policy must have an effective date. You can only deduct the paid leave wages that were paid out following the effective date of your policy. It is possible to make a retroactive effective date as long as it falls inside the taxable year that the policy was adopted. For example, if the policy was adopted on July 1, 2018, the effective date can be January 1, 2018 and still work.
The paid leave must equal at least 50% of the wages that the employee normally makes.
Who can qualify for the credit?
Anyone who has worked for you for at least one year and received less than $72,000 in paid leave can qualify for the credit.
What kind of leave can qualify?
There are restrictions on what kind of leave qualifies for paid family or medical leave. The leave must fall into one of the following categories:
- Birth of the employee’s child and to care for that child;
- The adoption or fostering of a child;
- Caring for a spouse, child or parent with a serious health condition;
- An employee dealing with a spouse, child or parent being called to active duty in the Armed Forces;
- Care for a service member that is related to the employee.
If the leave that you cover does not fall into one of these categories, then that leave does not qualify for the paid family or medical leave tax credit.
How can I determine how much of a credit I receive?
The IRS calculates the credit by taking a percentage of the wage that’s paid to the employee while the employee is on leave. There’s a cap of 12 weeks per year on the pay.
If an employee receives 50% of their pay, the employer will receive 12.5% of that in tax credit. For every percentage point the pay goes up, the credit is increased by 0.25%.
Does this credit affect my other business tax credits?
Yes. You can’t double dip and take wage tax deductions or credits and then also take paid leave credit.
These are just some of the basic rules that help you establish a paid family and medical leave policy within your company. There are other, more intricate rules and it’s important that you talk to your tax adviser before you start enacting a paid family and medical leave policy in your company.
If you have any further questions, you can also reach out to us here at The Tax Credit Group. We have a team of professionals that can help you with all of your needs.
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