Written by: Lindsay Von Someren, Credit Karma, with contributions from Bobbi Kloss, BAN Director of Human Capital Management Services.
In a nutshell: The Tax Cuts and Jobs Act contains a hidden gem: a tax credit for your employer if your employer pays you while you’re out on family or medical leave. If you’re lucky, you might be able to persuade your employer to take advantage of the credit. Here are a few things both employers and employees should know about the new credit.
Have you heard of the employer credit for family and medical leave?
No? There’s also a good chance your employer hasn’t heard about the new credit either.
“It was one of the new tax laws that was not given as much attention as some of the others,” says Ari Brown, a CPA with Black Mountain Tax & Consulting of Fort Collins, Colo. As a result, Brown says, “I have seen very few businesses respond to the new tax credit.”
But there is a good reason both employers and employees should pay attention. This new family leave credit does provide an incentive for your employer to offer you paid leave. But there are rules and limitations for who can claim the credit. And the IRS has not yet issued detailed guidance to help employers better understand how the credit works.
The good: Your employer can now get a tax credit for paying you while you’re on leave
It’s no secret that maintaining a steady flow of income can be a problem if you need to take leave to have a baby or care for a sick family member. While the Family and Medical Leave Act, or FMLA, may require your employer to give you at least 12 weeks of leave per year to care for yourself or a qualifying family member, it doesn’t require your employer to pay you during that time.
That can create a one-two punch to your finances, because your expenses might be increasing due to family or medical circumstances at the same time your income declines.
Tax reform may have you covered, having created a family leave credit for employers who pay workers at least 50% of their normal wages while they’re on family and medical leave.
Not all “family” and “medical” leave counts, though — a few days off recovering from a cold likely won’t count. Instead, you’d need to have a “serious health condition” that makes you “unable to perform the functions” of your job after any paid sick leave runs out.
This credit is available to employers who provide leave pay for all qualified employees — both part-time and full-time. But there are other qualifications. You’ll need to have worked for your employer for at least a year. And there’s a wage cap that applies for the year prior to the tax year the credit is being claimed. For example, for an employer claiming a credit for wages paid to you in 2018, you must not have earned more than $72,000 in 2017.
The bad: The family leave credit is complicated
Unfortunately for your employer, this tax credit could require some additional paperwork.
To claim the credit, employers must have a written paid leave policy in place that provides for a least two weeks of paid family and medical leave annually to all full-time qualifying employees. The policy must provide paid leave that’s at least half of the wages the employer would normally pay the qualifying employee.
If your employer doesn’t already have such a policy in place, it would need to write one in order to claim this credit. What’s more, the IRS has left several questions about the credit unanswered, including when the written policy must be in place. The uncertainty could make it difficult for employers and their accountants to figure out whether they can claim this tax credit — which could mean fewer will see it as an incentive to pay workers on leave.
“I do see tax professionals tend to avoid some topics that the IRS hasn’t lent additional clarification on,” says Brown.
That’s especially unfortunate for this tax credit, which requires employers to get a written plan in place so that they can claim the tax credit next year.
“I see many tax professionals wait until January to brush up on the tax laws and credits before tax season starts. Nobody wants to leave tax savings on the table for their clients, but this is a topic tax professionals should be talking to and informing their clients of before tax season,” Brown adds.
The ugly: The family leave credit is short-lived
Further complicating things, this tax credit is only available for the 2018 and 2019 tax years.
That’s right — your employer could go through the hassle of getting a paid leave plan in place (even though the IRS itself isn’t sure yet how it works) only to be able to claim the credit for a scant two years.
Finally, to put the cherry on top, the maximum credit your employer could possibly get for paying you while you’re on leave is 25% of the amount it paid to you.
The minimum credit is 12.5% of your leave pay, if your employer pays you 50% of your regular pay while you’re on leave. The credit amount increases by a quarter of a point for each percentage point above 50% of the regular wages your employer pays you while you’re on leave. In addition to the 25% cap, other limitations may apply.
Here’s an example of how the family leave credit could work for an employer. Say your employer pays you a total of $6,000 while you’re on leave, and that’s half your normal wage. Provided you and your employer meet all other eligibility requirements, your employer could get a credit for 12.5% of that amount — or $750.
“The short-term tax credit gain does not appear to be an impetus for some employers to work through the strategies necessary to develop a new policy,” says Bobbi Kloss, director of human capital management services for Benefit Advisors Network, a nationwide employee benefits firm. “Right now, it appears to be ‘All Quiet on the Western Front’ in regard to employers being tempted to take this tax credit.”
The new family and medical leave credit has pros and cons — for both employers and employees. On one hand, an employer who already has or will soon have a paid leave policy in place could see a tax benefit thanks to the new credit. And employers who were considering offering paid leave might see the new credit as added incentive to offer their employees this valuable benefit.
But if your employer doesn’t yet offer paid leave, could you ask it to now that there’s a possible tax credit for doing so?
“It would be a big ask of an employer to determine if it should restructure their policy and budget at the time of a leave request,” says Kloss. “With all the considerations, to implement any policy for an employer cannot happen overnight.”
Instead, Brown suggests using this as an opportunity to start a discussion with your employer before you need to take leave.
“Employees having some knowledge of tax laws and credits that could benefit them is a great way to start the dialogue with their employers,” Brown says. “If their employer doesn’t offer paid leave, it could simply be because they do not know about it or just never thought about it.”
“My advice is to ask questions, be open with your employer,” he says, “and never be afraid to speak up for benefits that are important to you and your individual situation.”