The sweeping Tax Cuts and Jobs Act enacted on December 22, 2017 provided for a new business credit for wages paid to employees during any period of time that the employee is on family and medical leave.

Wages paid to employees during the time periods beginning 1/1/18 thru 12/31/19 may qualify for the credit. To qualify for the credit, (1) Wages must be paid to an employee while they are on family or medical leave (2) The wage base paid must be equal to at least 50% of the wages you would have normally paid the employee and (3) the amount of leave used to calculate the credit cannot exceed 12 weeks for an employee for any taxable year. You (the employer) must have a written leave policy stating (1) all qualifying full-time employees will receive at least two weeks of annual paid leave and (2) all less than full-time employees must be given leave on a pro rata basis.

The credit is 12.5% of the amount of wages paid to the employee while they're on leave, and is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50% of their base wage. If you claim the credit amount, you must reduce the deduction for wages paid by the amount of credit (you cannot claim both the credit and wage deduction). Any "paid leave" provided by the employer such as vacation, personal leave or medical/sick leave that is required (by the employer) to be used first, cannot be considered wages for calculating the credit. Additionally, any leave paid by a State or local government or required by State or local law shall not be taken into account in determining the amount of paid family and medical leave provided by the employer.

The credit is calculated based on wages paid to a qualifying employee. A qualifying employee is one who:

• Is an employee under the Fair Labor Standards Act
• Has been employed for one year or more
• Was paid compensation not exceeding $72,000 in the preceding tax year? For example, an employer claiming a credit for paid family leave wages paid to an employee in 2018, the employee cannot have earned more than $72,000 in 2017

Family and medical leave covers a leave for:

• Birth of a child and to care for the child
• Adoption of a child or foster care
• Care of a spouse, child or parent for a serious health condition
• A serious health condition of the employee that prevents them from performing their job
• Any need due to an employee's spouse, child or parent who is a covered active military member
• Care for a military service person who is a family member

If an employer does not otherwise pay wages to an employee who is out on qualified family leave the employee can take short-term disability and then Paid Family Leave, or Paid Family Leave and then short-term disability, if they qualify. But they cannot be taken at the same time.

There are four steps for an employee to request Paid Family Leave:

1. First, the employee must notify their employer at least 30 days before the leave will start, if it’s foreseeable. Otherwise, notification must be as soon as possible.
2. Employee must obtain the request form for the type of leave they need to take (from your employer or your employer’s insurance carrier) and complete the Request For Paid Family Leave Form. Then submit it to your employer.
3. The employer must fill out their section of the form and return it to you (the employee) within three business days. 
4. The employee must then submit the request forms specific to the leave you are taking, and supporting documentation directly to the employer’s Paid Family Leave insurance carrier.  

The insurance carrier must pay or deny the request within 18 calendar days of receiving the completed request.

There are still some areas of the Paid Family Leave Act that require additional clarification. We expect that the IRS will provide additional guidance regarding when the written policy must be in place, how paid family and medical leave relates to an employer's other paid leave, how to determine whether an employee has been employed for one year or more, the impact of State and local requirements, and whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit. Dermody, Burke & Brown CPAs is continuing to monitor any updated developments in these areas. Please contact the tax professionals here at Dermody, Burke & Brown with any questions or concerns you may have regarding paid family leave.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.