Tax Credit Available for Family and Medical Leave Paid by Large Employers
Large employers with more than 500 employees are not able to take advantage of the payroll tax credits enacted in the Families First Coronavirus Response Act (“Families First Act”). [1] However, the Tax Cuts and Jobs Act of 2017 provided a general business tax credit under Sections 38 and 45S of the Internal Revenue Code for eligible employers that provide paid family and medical leave. The provision is not nearly as generous as the credit available under the Families First Act to employers with less than 500 employees, but it does provide some monetary relief. The provision originally was scheduled to expire at the end of 2019 but was extended through 2020 by the Taxpayer Certainty and Disaster Relief Act enacted in late 2019. [2]
In order to be eligible, an employer must have written policies in place that allow all full-time qualifying employees not less than two weeks per year of paid family and medical leave, and all less-than-full-time qualifying employees a commensurate amount of leave on a pro rata basis. Leave that is either paid or required by a state or local government does not count. Also, leave that is not designated as family and medical leave does not count. The policy must provide for payment under the program that is at least 50% of the wages normally paid to an employee.
A “qualifying employee” in 2020 means any employee as defined in Section 3(e) of the Fair Labor Standards Act of 1938 who:
1) has been employed by the employer for one year or more; and
2) for 2019, had compensation not in excess of $75,000. [3]
Any determinations as to whether an employer or an employee satisfies the applicable requirements for an eligible employer or qualifying employee is made by the Internal Revenue Service, based on information provided by the employer.
The provision allows eligible employers to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. [4] For a salaried employee, wages are converted to an hourly rate.
The maximum amount of family and medical leave that may be taken into account with respect to any employee for any taxable year is 12 weeks.
A few examples may be helpful.
Employer A pays family leave under a written policy at a rate of 50%. Employee X normally is paid $16 per hour. Employee X takes family and medical leave for 3 weeks (normally 40 hours per week) during which the employer pays $8 per hour. Employer A pays Employee X $960 for the 3 weeks. Employer A is entitled to a credit of $120 (12.5% of $960).
Employer B pays family leave under a written policy at a rate of 60%. Employee Y normally is paid $16 per hour. Employee Y takes family and medical leave for 3 weeks (normally 40 hours per week) during which the employer pays $9.60 per hour. Employer B pays Employee Y $1,152 for the 3 weeks. Employer B is entitled to a credit of $172.80 (15% of $1,152). The 60% rate exceeds 50% by 10%. As a result, the credit is increased by 0.25 percentage points for each percentage by which the payment rate exceeds 50%. Thus, the credit percentage is 15% (12.5% plus 2.5%).
Note: if the employer pays the leave at 100% of the wages normally paid to the employee, then the credit is 25% of the wages.
If you would like to more information on the tax credit, please contact an attorney in our Tax and Employee Benefits and Executive Compensation Practice.
[1] There is some ambiguity in the Families First Act as to how employees are counted and how certain related businesses might be aggregated for purposes of the paid leave requirements and the associated tax credit.
[2] The credit under Sections 38 and 45S of the Internal Revenue Code is available to all employers. However, any wages taken into account by an employer with less than 500 employees in determining the credit allowed by the Families First Act cannot be taken into account in determining the general business credit under Sections 38 and 45S of the Internal Revenue Code.
[3] Not greater than 60% of the compensation threshold used to determine highly compensated employees for tax-qualified plan purposes. That threshold was $125,000 for 2019, making the applicable wage limit $75,000.
[4] Notwithstanding, the overall limitations of Section 38 the Internal Revenue Code may further limit the credit.