While doing some research for another project, I was reminded that in the CPA Full Employment Act of 2017, Republicans included a tax credit for employers offering paid family leave. Since I have some W-2 income in addition to my Patreon income, I decided to look into it and see exactly how the tax credit works.
The good news is, it is in many ways better than I expected. The bad news is, like all such publicly-subsidized private sector schemes, it’s way, way more complicated than it needs to be.
What is the paid family and medical leave credit?
The paid family and medical leave credit is a business tax credit of between 12.5% and 25% of the wage replacement offered by employers to qualifying employees who take leave for the reasons spelled out in the Family and Medical Leave Act (FMLA).
How is the credit calculated?
To qualify for the credit, qualifying employees must be offered at least 50% of their wage for at least 2 weeks per year for qualifying FMLA events. The credit is phased in at replacement wages between 50% and 100%. At a 50% replacement wage the credit is 12.5%, and at a 100% replacement wage the credit is 25%.
Who are qualifying employees?
Qualifying employees are those who have worked at the company for a year or more, and earned less than roughly $72,000 per year (this amount should be adjusted upward over time, and is based on an inscrutable IRS calculation).
What are qualifying FMLA events?
Qualifying FMLA events are:
- The birth of a son or daughter of the employee and in order to care for the son or daughter.
- The placement of a son or daughter with the employee for adoption or foster care.
- Caring for the spouse, or a son, daughter, or parent, of the employee, if the spouse, son, daughter, or parent has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of the employee’s position.
- Any qualifying exigency (as the Secretary of Labor shall, by regulation, determine) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is a member of the Armed Forces (including the National Guard and Reserves) who is on covered active duty (or has been notified of an impending call or order to covered active duty).
- Caring for a covered service member with a serious injury or illness if the employee is the spouse, son, daughter, parent, or next of kin of the service member. The FMLA purposes are the purposes for which an employee may take leave under the FMLA. The terms used in this Q&A-8 have the same meaning as defined in section 825.102 of the FMLA regulations, 29 CFR § 825.102.
How does an employer qualify for the credit?
This is the important part. To qualify for the paid family and medical leave credit, the employer must:
- adopt a written policy;
- providing at least 2 weeks of annual paid leave for all qualifying FMLA events;
- with at least a 50% wage replacement rate for all qualifying FMLA events;
- for all qualifying employees.
If any one of these four conditions is not met, you will not qualify for the credit for any of your employees!
What should a paid family and medical leave policy look like?
I’m not a lawyer (and I’m especially not your lawyer), but if you want to ensure your eligibility for the paid family and medical leave credit, you need to do the following:
- Put it in writing. The current IRS regulations do not require you to distribute your policy to employees, but you must adopt a written policy before any replacement wages are eligible for the credit. If you start offering paid leave and only later adopt a written policy, you will only be eligible for the credit for wage replacement offered after the adoption of the policy.
- Specify at least 2 weeks of paid leave for all qualifying FMLA events. You can offer different lengths of leave for different FMLA events, but your policy must include at least 2 weeks of paid leave for every FMLA event or you are ineligible for the credit.
- Specify at least 50% wage replacement for all qualifying FMLA events. You can offer different amounts of wage replacement for different FMLA events, but your policy must include at least 50% wage replacement for every FMLA event or you are ineligible for the credit.
- Specify all qualifying employees. To qualify for the credit, you must offer paid family and medical leave to all qualifying employees. You can extend the policy to other employees (those employed less than a year, and those making more than roughly $72,000 per year, although those employees’ wage replacement won’t be eligible for the credit) but you must offer the paid leave benefit to every qualifying employee or you are ineligible for the credit for any of your employees.
Include this text in your plan
This is so important I want to mention it separately. Your written paid family and medical leave policy must include the following language (or a lawyer-approved alternative):
[Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.
The technical reason for this is that the FMLA itself does not protect employees who work less than 1,250 hours per year, but in order to claim your paid family and medical leave tax credit you must extend identical protections to employees even if they work less than 1,250 hours per year, as long as they have worked for at least one year.
How to claim the credit
File form 8994 “Employer Credit for Paid Family and Medical Leave” and Form 3800 “General Business Credit.”
How pure is your hate?
Sound simple enough? Not so fast. You didn’t really think you’d get off that easy, did you?
Wages and salaries are, naturally, deductible business expenses. But the amount of the paid family and medical leave credit you claim is first applied against your wage and salary deduction. That means a firm with a 10% marginal tax rate that offers a 100% wage replacement for qualifying employees for qualifying FMLA events does not receive the 25% tax credit they were promised by the Smash and Grab Tax Act of 2017.
A simple illustration: a $1,000 wage bill would normally be 100% deductible, reducing the firm’s taxes by $100. After a $250 credit is granted, the firm’s taxes are only reduced by $75, turning the statutory “25%” tax credit into a 22.5% tax credit.
There is no earthly reason to do things this way. But while we continue to fight for universal, comprehensive family and medical leave, we still have to do what we can to protect each other. So if you have any employees, this is as good a time as any to get started on a written policy for your company.