Tax Reform Prompts Businesses to Rethink Employee Leave Policies

New Tax Liability Credit is Changing How Business Owners Compensate Employees During Leave

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While there tends to be focus on the larger line items resulting from the Tax Cuts and Jobs Act of 2017, there are some lesser-known tax breaks within this tax reform that have created incentives for business owners to reconsider the benefits they extend to employees when they take paid leave.

Under the new tax law, employers are now eligible to receive credit on their tax liability if they extend at least partial compensation to employees who take family leave during 2018 and 2019.

New FMLA Paid Leave Tax Credit

The Family and Medical Leave Act of 1993 (FMLA) already requires most businesses with at least 50 employees to allow up to 12 weeks off for certain specified reasons to care for family members. While there is no requirement or guarantee of compensation for this leave, the new tax credit provides substantial reason for employers to consider paying employees during their absences.

To receive the credit, employers will need to extend wages to employees on leave during 2018 and 2019 under these guidelines:

  • Employers pay wages to employees on leave that equal 50% to 100% of their normal wages.
  • The credit begins at 12.5% when an employee is paid at least 50% of their normal wage. The tax law provides for upward increases in the credit percentage depending upon how much of an employee’s normal wage is paid, and how many hours of leave the employee takes.
  • This credit can be applied for part-time employees who take leave.
  • The maximum credit is 25% when an employee is paid 100% of their normal wage.
  • The credit acts as a direct reduction of income tax liability, not a deduction from income (more valuable than a standard tax deduction).
  • The credit is not available for leaves of less than two weeks, or for employees who are considered ‘highly compensated’ under normal tax rules (excludes employees with $72,000 or more in wages per year).

While the credit does not equal the full cost of compensating an employee on leave, this is a direct reduction of the employer’s total tax liability for the year. This credit is an excellent incentive for businesses to provide paid leave benefits for employees to care for family members in need.

Contact a K·Coe Isom tax expert with questions on the credit’s applicability and its potential tax effect on your business

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