IRS’ first FAQ on paid-leave credit answers some key questions
Employers finally have federal guidance regarding the paid-leave tax credit created under the Tax Cuts and Jobs Act (TCJA), but that guidance is likely to fall short of what many firms were expecting.
In fact, in the initial FAQ on the tax-credit, the IRS even said it will eventually offer more comprehensive guidance for employers. But until that additional guidance comes, employers will have to make do with what the feds just rolled out.
12.5% to 25% credit
What employers already knew about the credit: It was established for employers that provide paid family and medical leave, as described under the FMLA, to employees for wages paid between Jan. 1, 2018, and Dec. 31, 2019 and will sunset unless Congress decides to extend it. Employees on leave must be paid at least 50% of their normal wages while on leave.
The tax credit ranges from 12.5-25% of the amount of wages paid to a worker during leave, depending on exactly how much of their normal wages are actually paid out. The credit only applies to those who earn below $72,000 and doesn’t apply if by paid leave is mandated by their state or local law.
While the FAQ essentially reiterated a lot of what was in the TCJA, it did clarify what constitutes “paid family and medical leave” under the credit:
- Birth of an employee’s child and to care for the child.
- Placement of a child with the employee for adoption or foster care.
- To care for the employee’s spouse, child, or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
In addition, if employers provide paid vacation, personal, medical or sick leave that isn’t specifically for one of those reasons, it will not be considered family and medical leave for the purposes of the tax credit.
The FAQ also clarified how employers must calculate the credit. For example, companies must reduce their deductions for wages paid by the amount of any tax credit for paid leave.
The attorneys over at Winston & Strawn LLP offered a specific example of how the calculation would apply to an employee earning $50,000 that included $5,000 of paid FMLA leave. In this example, the employer received a $1,250 credit for the leave it provided. Therefore, it could only deduct $48,750 of the employee’s wage expense ($50,000-$1,250).
What the feds didn’t include
Despite the clarifications, the IRS said IT has a lot more guidance coming on the finer points of the credit. Specifically, the agency said it will address (“eventually”) the following in future guidance:
- When the written policy [on paid FMLA for purposes of tax-credit calculation] must be in place;
- How paid “family and medical leave” relates to an employer’s other paid leave;
- How to determine whether an employee has been employed for “one year or more”;
- The impact of state and local leave requirements; and
- Whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.