IRS FAQs on Paid Family Leave Federal Tax Credit for Employers

May 17, 2018

The IRS has recently released answers to Frequently Asked Questions (FAQs) for employers who want to claim a business credit on wages paid to an employee (who earned up to $72,000 in 2017) on paid family and medical leave, who met certain conditions. The IRS has adopted Section 45S, also referred to as Employer Credit for Paid Family and Medical Leave. To claim the business credit, employers must have a written policy that meets certain requirements, including the following items:

  1. The employer must provide at least two weeks of paid family and medical leave per calendar year to all qualifying employees. A qualified employee is any employee who has been employed for more than one year under the Fair Labor and Standards Act and did not surpass $72,000 in income for 2017.
  2. The two weeks of paid leave cannot be less than 50% of the employee’s normal income.
  3. Family and Medical Leave for purposes of Section 45S is defined as leave taken for one of the following events:
  • Birth of employee’s child and to care for the child
  • Placement of adopted child or foster child with employee
  • To care for employee’s child, spouse or parent who has a serious health condition
  • Employee is diagnosed with a serious health condition and is unable to perform job responsibilities
  • Employee’s spouse, child or parent is ordered to report or has an impending call to active duty military service in the United States Armed Forces
  • To care for a United States military service member who is the employee’s spouse, child, parent or next of kin.

4. The effective date of the credit is 1/1/2018 for any wages paid in the employer’s taxable years that begin after December 31, 2017 and is not currently available for wages paid in taxable years that begin after December 31, 2019.

According to the IRS FAQ, “If an employer provides paid vacation leave, personal leave, 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 will not be taken into account in determining the amount of employer-provided paid family and medical leave.”

The employer can calculate the credit by calculating the applicable percentage to the wages paid to the qualifying employee while on family and medical leave for up to 12 weeks per tax year. As stated in the IRS FAQ, “The minimum percentage to use for calculation is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%. In certain cases, an additional limit may apply.”

The IRS is expected to release additional instruction with regard to due dates to written policy, clarification with how paid family and medical leave may or may not coordinate with other employer leave policies, calculation as to length of employment determinations, etc. For more information, please see the IRS’s official FAQ page:

https://www.irs.gov/newsroom/section-45s-employer-credit-for-paid-family-and-medical-leave-faqs