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March 20, 2019
Employer Tax Credit for Paid Family and Medical Leave
The employer credit for paid family and medical leave
(Internal Revenue Code [IRC] §45S) was enacted as part of
the 2017 tax revision (P.L. 115-97) (commonly referenced
as the Tax Cuts and Jobs Act, or TCJA, the title of the
House-passed version of the bill). When enacted, this credit
was made available for two years, 2018 and 2019. The
credit's primary sponsor, Senator Deb Fischer, called this
credit a two-year pilot program, after which there would
be an opportunity to evaluate whether the credit was
achieving its intended goals. This In Focus (1) provides an
overview of the employer credit for paid family and
medical leave; and (2) highlights some issues to consider
when evaluating the credit.
The Em pioyer Credit for Paid Family
and Medical Leave
The employer credit for paid family and medical leave
(FML) can be claimed by employers providing paid leave
(wages) to employees under the Family and Medical Leave
Act of 1993 (FMLA; P.L. 103-3). The credit can be claimed
for wages paid during tax years that begin in 2018 and
2019.
The credit rate depends on how much employers provide
for paid FML, relative to wages normally paid. If paid leave
is 50% of wages normally paid to an employee, the tax
credit is 12.5% of wages paid. If paid leave is 100% of
wages normally paid to an employee, the tax credit is 25%
of wages paid. The credit rate increases from 12.5% to 25%
ratably as leave wages increase from 50% to 100% of
wages normally paid. No credit can be claimed for paid
FML that is less than 50% of wages normally paid. Further,
no credit can be claimed for wages paid on leave that
exceed an employee's normal wage rate.
The credit can only be claimed for paid FML provided to
certain lower-compensated employees. For wages paid to
an employee to be credit eligible, compensation to the
employee in the preceding year cannot exceed 60% of a
highly compensated employee threshold. For 2018,
employee compensation in 2017 cannot have exceeded
$72,000. Further, for an employer to claim a credit for
wages paid to an employee, the employee must have been
employed by the employer for at least 12 months.
The amount of paid FML wages for which the credit is
claimed cannot exceed 12 weeks per employee per year.
Further, all qualifying employees must be provided at least
two weeks of paid FML for an employer to be able to claim
the credit (the two-week period is proportionally adjusted
for part-time employees).
Tax credits cannot be claimed for leave paid by state or
local governments, or for leave that is required by state or
local law. Thus, this tax incentive does not reduce the cost
of providing leave in jurisdictions where employers are
required to do so by a state or local authority.
A tax credit can only be claimed for wages paid for family
and medical leave. If an employer provides paid leave (e.g.,
vacation, personal, or sick leave) that is not specifically set
aside for a FMLA-qualifying purpose, that leave is not
considered FML leave. Family and medical leave is
restricted to leave associated with (1) the birth of a child or
placement of an adopted or foster child with the employee;
(2) a serious health condition of the employee or the
employee's spouse, child, or parent; (3) an exigency arising
out of the fact that a close relative is a member of the
Armed Forces and on covered active duty; or (4) to care for
a covered servicemember who is a close relative of the
employee.
For employers, there are other requirements associated with
the credit. To claim the credit, an employer must have a
written family and medical leave policy in effect. The
policy cannot exclude certain classifications of employees
(e.g., unionized employees). Additionally, a qualified
employer is required to claim the credit, unless the
employer opts out. For employers, the amount of wages and
salaries deducted as a business expense is reduced by the
amount of credit claimed. Further, the credit cannot be
claimed if wages have been used to calculate another tax
credit (to avoid a double tax benefit). The credit is part of
the general business credit, meaning that unused credits
from the current tax year can be carried back one year
(offsetting the prior year's tax liability) or carried forward
up to 20 years to offset future tax liability. The credit is
allowed against the alternative minimum tax (AMT).
Legislative Background
The employer credit for paid family and medical leave was
added to the IRC in P.L. 115-97. In the 115th Congress, the
House and Senate each passed their own versions of the
Tax Cuts and Jobs Act. The House version did not contain a
credit for paid family and medical leave. The credit was
introduced in the Senate amendment, and the conference
agreement followed the Senate amendment. The Strong
Families Act (S. 1716) in the 115th Congress and earlier
proposals of the same title proposed a similar tax credit.
Revenue Loss of the Credit
The Joint Committee on Taxation (JCT) estimated that this
credit will reduce federal revenue by $4.3 billion between
FY2018 and FY2027. Most of the revenue loss is in
FY2019 and FY2020, as the credit currently expires at the
end of calendar year 2019 (see Figure 1). Revenue losses,
however, are expected beyond FY2020 as businesses carry
forward unused credits from 2018 and 2019 to offset fiture
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