Focusing on Employee Health Could Net Organizations Tax Benefits
Employers who provide paid family and medical leave to employees may qualify for a business tax credit through 2019
As the U.S. unemployment rate has seen record lows this year (3.7 percent in August), companies are scrambling to update their recruitment processes and benefits packages to stay competitive in the battle for talent acquisition.
As such, benefits like paid family and medical leave are being incorporated more and more, in addition to more standard health insurance and vacation benefits. Paid family and medical leave offers employees paid the time away to care for a new child or for a family member with a severe illness, or paid the time away for the employee if he or she has a medical issue rendering them unable to work.
The Family and Medical Leave Act of 1993 implemented entitlements for workers to have unpaid leave for these issues, but “no federal law requires private-sector employers to provide paid leave of any kind,” noted the Congressional Research Service in a recent report. Thus, paid leave is still dependent on the employer.
Research from the Bureau of Labor Statistics shows that in 2018, just 17 percent of all civilian workers had paid family leave benefits, while 89 percent had access to unpaid family leave. In private industry specifically, 16 percent of workers had paid family leave, and 88 percent had unpaid family leave.
So, even though paid family and medical leave may be becoming more commonplace, it’s clear that the majority of the workforce still doesn’t have access to these benefits which can encourage new mothers or those facing illnesses to return to their jobs after a necessary time away.
To incentivize organizations to include these offerings in their benefits packages, the IRS has implemented tax benefits to employers who provide paid family and medical leave for 2018 and 2019.
Details of the tax credit for employers
The Tax Cuts and Jobs Act (TCJA) of 2017 enacted the new tax credit for employers. For the purposes of this benefit, an employer is “any person for whom an individual performs services as an employee under the usual common-law rules applicable in determining the employer-employee relationship.”
The tax credit applies to wages paid after December 31, 2017, and before January 1, 2020. There are ways to claim the credit retrospectively if employers meet all the requirements. The credit is between 12.5 percent and 25 percent of the wages paid to an employee during his or her leave, for up to 12 weeks per taxable year. The minimum of 12.5 percent is increased in 0.25 percent increments for every percentage point by which the amount paid to the employee exceeds half of the employee’s wages, and the limit is 25 percent.
Eligibility requirements include the following:
- There must be a written policy in place that states that full-time employees have at least two weeks of paid family and medical leave per year, and this amount can be pro-rated for part-time workers.
- The family and medical leave pay must be at least 50 percent of the employee’s normal wages.
- The employee must have been employed by the employer for at least one year and must not have earned more than $72,000 in compensation for the prior year (2017 or 2018).
Employers must also ensure that they do not “discharge or discriminate against any individual for opposing any practice prohibited by the policy,” according to the IRS.
The tax credit applies only to family and medical leave that was taken for:
- The birth of and care for an employee’s child
- A child was adopted by the employee or placed with them for foster care
- The employee cared for a close family member—a child, spouse, or parent—with a serious health condition
- The employee had a serious health condition, making them incapable of doing their job
- There was a qualifying need for an employee’s absence related to their child, spouse, or parent being on covered active duty in the Armed Forces
- A service member who is a child, spouse, parent, or next of kin to the employee needed care
Although the tax credit ends after 2019, it’s possible that it could be extended.
If you have questions about tax planning, get in touch with our team at Provident CPA & Business Advisors. We’ll walk you through applicable tax law, and help you pay the least amount of tax legally possible.
The Tax Benefits of Putting Your Kids on Your Payroll
The family that works together, saves money together
What are your kids doing this summer? While they may just plan on relaxing or having fun with school out, it might be good for them – and you – if you put them to work. Not a lot of business owners know this, but they can get a pretty nice tax break by hiring their own children.
How it works
If you run a business and can find legitimate work for your kids who are under age 18, you can pay them up to $12,000 per year and they won’t have to pay any income tax. The benefit for you is that you will not have to worry about worker’s comp or unemployment insurance.
And, depending on the structure of your business, you may not have to pay any payroll taxes either. The companies that fall into this category are sole proprietorships, LLCs taxed as disregarded entities, and LLCs taxed as partnerships and owned by you solely. This does not apply to corporations, however, though they may be able to do something about that:
How corporations can get around this
With the right strategy, an S Corp or C Corp business may not have to pay payroll taxes on the income of children either. In order to do this, you would need to create a family management company, which would be set up as a sole proprietorship separate from your corporation. You would then pay your children out of this company. And as a sole proprietorship, it would be exempt from having to pay those payroll taxes.
Additional tax benefits
With a child – or children – on your payroll, you get to move income into their lower tax bracket from your higher one. You can also take advantage of business deductions to reduce your tax liability even more.
Just remember that it has to be real work
The word “legitimate” used earlier should not be taken lightly. This means that doing chores around the house will not count. What you hire your kids to do should be directly related to your business, but this doesn’t have to involve anything too complex or taxing.
Mowing a lawn or otherwise taking care of the landscaping would work. They could also do simple tasks like filing or shredding old documents. And if they have some tech skills, you may want to utilize them for your website or social media networks. A younger child who becomes part of your advertising campaign may qualify. Just remember to carefully document exactly what you have them do.
What about paying a spouse?
Another family member some business owners are often eager to put on their payroll is their spouse. But, in many cases, this doesn’t always make good sense. For one thing, you probably won’t save any money on taxes.
If you plan to file a joint return, paying your spouse may give you a business write-off, but it counts as income on your personal return. Plus, there are the payroll taxes to think about. And as for Social Security, in most cases, it is more beneficial for a spouse to claim the spousal benefit than their own.
Questions about putting the family on your payroll? Contact Provident CPA & Business Advisors
Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities.
Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on the new tax code, and to find out how we can help your business exceed your expectations.