By: Adam Leonard and Cheryl Rhew
With the passing of the Tax Cuts and Jobs Act of 2017 came the largest number of changes to our tax code in over 30 years. Many of these new changes have been built up and highly advertised, but there were just as many changes that may not be as well known, and could possibly benefit your company.
One of these changes is the FMLA tax credit, which provides qualified employers a tax credit based on a percentage of wages paid to qualifying employees on family and medical leave,for which job protection is provided under the federal Family and Medical Leave Act.
There are several requirements and conditions that must be met to claim the credit, but it is likely that if your company has a policy that grants wages of at least 50% of an employee’s pay for at least two weeks for reasons relating to family and medical leave, you may be able to take advantage of this new credit.
How is the credit calculated?
The calculation of the credit differs based on what percentage of the employee’s pay is paid out while on leave. If 100% of the normal pay is granted to the employee, then the maximum credit is allowed at 25% of the pay provided. If the employee is paid 50% of normal wages, the credit is calculated at 12.5% of the wages paid. The percentage of the credit is increased by 0.25% for each additional percent of normal wages paid to the employee. For example, if the employee is granted 60% of normal pay on leave, the credit would then be 15% of those wages paid (12.5% + 2.5%). One additional thing to note here is that whatever credit is taken, that amount will be deducted from the company’s wage expenses on the tax return, which will increase the taxable income for that amount.
For what years can the credit be claimed?
The credit was initially effective for wages paid in taxable years beginning after December 31, 2017, and ending in taxable years beginning after December 31, 2019. However, on December 20, 2019, the Further Consolidated Appropriations Act was signed into law by President Trump. This act extended the credit to wages paid in taxable years beginning before December 31, 2020. So for calendar year taxpayers, this credit can be claimed on the 2018, 2019, and 2020 returns. It is not too late to amend any 2018 returns to take advantage of this credit.
What are other requirements or conditions?
One requirement is for the employee who is being paid the wages to be a “qualifying employee.” A qualifying employee is defined as one who has been employed by the employer for one year or more, and whose compensation does not exceed a set amount in the previous year. Those amounts are compensation of $72,000 for the 2017 year (to be claimed on the 2018 business tax return) and $75,000 for the 2018 year (to be claimed on the 2019 business tax return). A written policy that provides for the leave pay must be in place beginning with the 2019 tax year to claim the credit.
There are other conditions or limitations that may apply based on your company’s particular situation.
If you have any questions or would like assistance in determining if your company qualifies for the new FMLA tax credit, please reach out to your HPG tax professional who will be happy to assist you.