What You Need to Know about the Employer Tax Credit for Paid Family and Medical Leave

As an employer that provides paid family and medical leave to our employees, you may qualify for a tax credit. How does it work?

Employer Tax Credit Requirements

• Available for paid family and medical leave wages paid in tax years beginning in 2018 through 2025.
• Pay any employees on leave at least 50% of the wages they normally would receive.
• Have a written leave policy that satisfies certain requirements
• All qualifying full-time employees must be given at least two weeks of annual paid family and medical leave
• Employees who work less than full-time must be given leave on a pro rata basis
  

Paid Family and Medical Leave Employer Credit

The credit is 12.5% of the amount of wages paid to the employees while they’re on leave, increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.

Examples of Paid Leave Credit

50% of Wages Scenario

An employer pays $10,000 of wages to Andre, a qualifying employee, while he is on family and medical leave.

This is 50% of Andre’s normal wages.

The employer can claim a paid family and medical leave credit of 12.5% of $10,000, or $1,250.

60% of Wages Scenario

An employer pays $12,000 of wages to a Sandra, a qualifying employee, while she is on family and medical leave.

This is 60% of the Sandra’s normal wages. The 60% rate of payment exceeds 50% by 10%.

The percentage of 12.5% used to determine the credit is increased by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50%. Thus, the employer’s credit is increased by 10 × 0.25%, or 2.5%.

The employer can claim a paid family and medical leave credit of 15% (12.5% plus 2.5%) of $12,000, or $1,800.

What Family and Medical Leave Qualifies for the Credit?

According to the IRS, family and medical leave for the purpose of the employer credit is:

1. Birth of an employee’s child and to care for the child
2. Placement of a child with the employee for adoption or foster care
3. To care for the employee’s spouse, child, or parent who has a serious health condition
4. A serious health condition that makes the employee unable to perform the functions of his or her position
5. 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 active duty) in the Armed Forces
6. To care for a service member who is the employee’s spouse, child, parent, or next of kin

Also, the IRS states that if an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above), that paid leave is not considered family and medical leave.

In addition, any leave paid by a State or local government or required by State or local law is disallowed in determining the amount of employer-provided paid family and medical leave.

Credit vs. Deduction

An employer can’t take both a credit and a deduction for amounts for which the paid family and medical leave credit is allowed.

However, you can elect to not take the credit, in which case you can claim the deduction.