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.