Federal law doesn’t make you pay employees who take family and medical leave. This is so even if you are required by the federal Family and Medical Leave Act to give up to 12 weeks of such leave time. (Businesses with fewer than 50 employees don’t have to offer any leave time.) But if you choose to continue compensation to an employee who takes such leave, you likely are a hero to this employee’s family and you can claim a new tax credit.
Here’s what you need to know about the credit so you can decide whether continuing pay to those on leave fits in your budget.
Which employees entitle you to a credit?
Only payments to a “qualifying employee” on family and medical leave entitle you to a credit. This is an employee who’s worked for you at least one year and has earnings not exceeding $72,000 in 2018. But it applies to both full-time and part-time employees.
Family and medical leave is because of one or more of the following:
- 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.
How much is the credit?
The credit ranges from 12.5% of earnings if you pay half of the normal wages, to 25% if you pay all of the normal wages. In effect, if you continue to pay the full salary to a worker on leave, you’re only paying three quarters of the cost because Uncle Sam is covering one quarter. Jackson Lewis has a credit calculator that you can use to get an idea of tax savings.
However, you must reduce the deduction for compensation by the amount of the credit you claim. This reduction is the same as other employer credits (e.g., work opportunity credit, empowerment zone employer credit). And you must pay payroll taxes on the earnings paid during leave time just as you would for sick days and vacation time.
What employers must do?
In order to claim any credit, you must have a written policy in place that meets the requirements of the law:
- Offering at least 2 weeks of family and medical leave annually to all qualifying employees. This includes full-timers as well as part-timers on a prorated basis.
- Paying at least 50% of wages normally paid.
Some benefits experts suggest that existing paid time leave policies may not be sufficient to entitle you to a tax credit. Create a separate policy for purposes of the credit.
Be sure to check state labor laws to determine your responsibilities for family and medical leave, which may be different than under federal law. Also recognize that so far, the new federal tax credit is only for 2018 and 2019; apparently Congress wants to see whether the credit will incentivize employers to pay for leave time. As the job market tightens, you may want to consider offering paid leave time to retain current employees and attract new ones.