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New credit benefits employers who provide paid family and medical leave

IRS Tax Reform Tax Tip 2018-149, September 25, 2018

Eligible employers who provide paid family and medical leave to their employees during tax years 2018 and 2019 might qualify for a new business tax credit. This new employer credit for family and medical leave is part of tax reform legislation passed in December 2017. Here are some facts about the credit to help employers find out if they might be able to claim it.

To be eligible, an employer must:

  • Have a written policy that meets several requirements, as detailed in Notice 2018-xx [ADD LINK].
  • Provide:
    • At least two weeks of paid family and medical leave to full-time employees.
    • A prorated amount of paid leave for part-time employees.
  • Provide pay for leave that is at least 50 percent of the wages normally paid to that employee.

The credit applies to these dates:

  • It is available for wages paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020.

The amount of the credit:

  • The credit is generally equal to 12.5 to 25 percent of paid family and medical leave for qualifying employees.

Here’s what kind of leave qualifies:

  • The leave can be for any or all of the reasons specified in the Family and Medical Leave Act:
    • Birth of an employee’s child.
    • 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.
  • However, leave paid by a state or local government, or that is required to be provided by state or local law, does not count toward the 50 percent.

Some employers are eligible to claim the credit retroactively to the beginning of their taxable year:

  • Normally employers can only claim the credit based on eligible leave taken after their new or amended policy goes into effect.
  • Read Notice 2018-71 for a description of special rules for when an employer can claim the credit retroactively.

To claim the credit, employers will:

  • Attach Form 8994 to their return. The IRS expects to have this new form available later in 2018.

The Notice sets out special rules and limitations that apply:

  • For example, only paid family and medical leave provided to employees whose prior-year compensation was at or below a certain amount qualify for the credit.
    • Generally, for tax-year 2018, the employee’s 2017 compensation from the employer must be $72,000 or less.

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