The new Tax Cuts and Jobs Act (TCJA) creates a unique tax break for certain businesses. If your company pays employees while they are out of work on a family or medical leave, it may claim a brand-new tax credit for a portion of the wages, beginning in 2018.
How it works:
The credit is available to employers regardless of their business size or whether they are mandated by the Family and Medical Leave Act (FMLA) to provide unpaid leave to qualified workers. To qualify for the credit, however, employers must pay wages to employees while they are on family or medical leave, unlike FMLA leave, which does not have to be paid.
Specifically, an employer must provide a leave of at least two weeks at a rate of at least 50% of the employee’s regular pay rate. The credit is based on the exact percentage of wages paid by the employer, ranging from 12.5% to 25%. For instance, the credit is equal to just 12.5% of the wages if the employer pays the minimum 50% of the regular pay rate. On the higher end, the credit is 25% of wages paid if the employer pays the worker’s entire salary.
Example: XYZ Corp. normally pays Amy $25 an hour for a 40-hour workweek. Therefore, her weekly wage total is $1,000. If XYZ pays her $15 an hour during a 12-week leave or 60% of her regular rate, she will receive $7,200 in wages. Thus, the credit comes to $1,080 (15% of $7,200). Conversely, if XYZ pays Amy her regular $25 an hour rate, for a 12-week total of $12,000, the credit equals $3,000 (25% of $12,000).
However, be aware of a significant restriction in the rules. The credit is available only for wages paid to workers employed by the company for at least a year and who are paid no more than $72,000 annually. This limit will be adjusted for inflation in the future.
Also, note that the company must offer family and medical leaves to both full-time and part-time workers employed for more than one year. Otherwise, the employer cannot claim any leave credits. The employer should establish a written policy regarding leaves and include it in the company’s policy manual.
Finally, “double dipping” is not allowed. In other words, if an employer claims the credit, it cannot also deduct the wages as regular business expenses. But the credit, a dollar-for-dollar reduction of the tax bill, will likely be more valuable to employers than the deduction.
Under the TCJA, the credit is scheduled to expire after 2019, but Congress might extend it if it becomes popular. Watch out for new developments in this area.
For more information about the above article or any business tax services, please contact Lesley L. Price, CPA at (334) 887-7022 or by leaving us a message below.