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IRS Issues Guidance on Tax Credit for Paid Leave

The IRS recently issued guidance regarding the tax credit available to employers who provide paid family and medical leave to employees under a qualifying policy. Specifically, the “Section 45S Employer Credit for Paid Family and Medical Leave FAQs” answer general questions about eligibility for the credit and the mechanics of the credit’s calculation.

Added to the Internal Revenue Code through last year’s tax reform legislation, this paid leave credit is a general business credit based on wages paid to qualifying employees during employer tax years that begin in 2018 or 2019.

Employers seeking to claim the credit must have a written policy in place meeting certain criteria, including:

  • Providing at least two weeks of paid family and medical leave per year to full-time employees (and a prorated amount to part-time employees) who: (1) have been employed for one year or more; and (2) had compensation for the preceding year that does not exceed a specified threshold (which would be $72,000 of 2017 compensation for a 2018 tax credit); and

  • Providing paid leave that is at least 50% of the wages normally paid to employees.

The IRS guidance summarizes qualifying family and medical leave as leave for one of the following reasons:

  • 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; or

  • To care for a service member who is the employee’s spouse, child, parent, or next of kin.

The guidance notes, however, that vacation leave, personal leave, or other medical leave (that is not for one of the stated reasons), as well as leave that is required by state or local law, is not considered “family and medical leave” for purposes of the credit.

For qualifying policies, the credit ranges from 12.5% to 25% of the wages paid to employees during eligible leave periods (up to twelve weeks per employee for a tax year), based on the amount by which the rate of payment under the employer’s policy exceeds 50% of regular wages. The employer’s deduction for wages paid is reduced by the amount of the credit claimed.

According to the guidance, the IRS will be issuing additional information regarding the administration of the credit, including:

  • When the written policy 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.

Contact the author or any member of the firm’s Labor and Employment Practice Group with any questions about the paid leave credit or family and medical leave generally.

About the Author

Andrew Bezouska is an attorney practicing out of our Madison office. He is a member of the Employee Benefits, Labor & Employment and Tax & Tax Advocacy practice groups. Contact Andrew by email or by phone at 608.252.9200.

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