Employer Tax Credits for Paid Family and Medical Leave

Section 45S of the Internal Revenue Code (IRC) offers a limited tax credit for employers who provided paid family and medical leave to their employees. The credit is available for wages paid between January 1, 2018, and December 31, 2019, a two-year timeframe. In order to avail themselves of the credit, employers must meet specific conditions.

First, employers must have a compliant written policy. Such a policy requires:

  • At least two weeks of paid family and medical leave, annually, for all qualifying employees who work full time (and pro-ration for part-time employees); and
  • Paid leave is not less than 50 percent of the wages normally paid to the qualifying employee.

Second, employees must be “qualified.” In order to be qualified, an employee must have been employed for one year or more, and not have received compensation in excess of the specified amount. For a tax credit applicable to taxable year 2018, the employee cannot have earned in excess of $72,000 in 2017.

Third, the family and medical leave must have been taken for one or more of several specified reasons:

  • Birth of an employee’s child and to care for said 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 (as defined by the Family and Medical Leave Act);
  • 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 in the U.S. Armed Forces; and/or
  • To care for a service member who is the employee’s spouse, child, parent, or next of kin.

The credit is based on the amount of wages paid to the qualifying employee for up to 12 workweeks of the taxable year. At minimum, the percentage is 12.5 percent, and it is increased by 0.25 percent for each percentage point by which the amount paid to the qualifying employee exceeds 50 percent of the employee’s wages. The credit is capped at 25 percent. There are additional limitations attributable to the credit.

For more information, please see Notice 2018-71 and related FAQs published by the Internal Revenue Service.