New Assignment Form
Contact Us

Tax Reform Gives Business Owners Credit for Paying Some Employees on Leave

Posted by Peter DeMarco on Jan 18, 2019 2:10:56 PM

One of the lesser known tax breaks of tax reform gives business owners some incentive to reconsider the benefits they extend to employees when they take family leave. 

The Tax Cuts and Jobs Act of 2017 is the tax reform measure so huge, Americans in many ways are still digesting what it will mean for them. That’s true for small business owners who may be unaware that they now have a good reason to consider paying employees when they take a leave of absence to attend to family members.

The Family and Medical Leave Act of 1993 already requires most businesses with at least 50 employees to allow up to 12 weeks off for certain specified reasons to care for family members. Individuals often use the protection when they experience the birth of a child, for example, or an extended illness in the family.

The FMLA protects the employment status and health care benefits of employees who take time off, but it doesn’t guarantee them compensation. Employers are not required to pay employees who elect to take such time away from their jobs, although many employers do so voluntarily as a way to provide additional benefits to their workforce.

Now the Tax Cuts and Jobs Act tells employers they can receive a credit on their tax liability if they extend at least partial compensation to employees who take family leave during 2018 and 2019. The credit is significant enough that it might give business owners reason to rethink how they compensate employees during leave.

The credit is available when employers pay wages to employees on leave that equal 50 percent to 100 percent of their normal wages. The credit begins at 12.5 percent when an employee is paid at least 50 percent of their normal wage.

The tax law provides for upward increases in the credit percentage depending on how much of an employee’s normal wage is paid and how many hours of leave the employee takes. The formula allows a credit even for part-time employees who take leave. The maximum credit is 25 percent when an employee is paid 100 percent of their normal wage.

The credit is only available in 2018 and 2019, unless Congress elects to extend it. As a credit, it acts as a direct reduction of income tax liability, not a deduction from income. That makes it a more valuable tax benefit than a standard tax deduction.

To illustrate the potential tax effect, consider the credit a business owner might claim by extending normal compensation to an employee who earns $52,000 a year, or $1,000 a week, during a six-week leave of absence. By paying the employee’s normal $6,000 wages during the leave, the employer can claim a credit of 25 percent of the amount, or $1,500.

That $1,500 credit is a direct reduction of the employer’s total tax liability for the year, although employers must reduce the amount of any deduction claimed for wages and salaries paid during the year by the amount of the credit. If an employer extended 50 percent of normal wages to the same employee, or $3,000, the credit would amount to 12.5 percent, or $375.

The credit is not available for leaves that are less than two weeks, nor is it available for employees who are considered “highly compensated” under normal tax rules. That generally excludes anyone whose normal wages or salary add up to $72,000 or more in a given year.

The credit does not equal the full cost of compensating an employee on leave. However, it is a credit that should not be left on the table when business owners are preparing their 2018 returns if they’ve compensated employees on leave.

Where employers have not typically extended wages to employees on leave, it might give reason for business owners to give some second thought to the benefits they provide to employees who take time to care for family members in need.

Information in this article is based off content from Peter DeMarco's article in Crain's Cleveland Business.New Call-to-action

Topics: Tax Planning & Strategies

Peter DeMarco

Peter DeMarco

Peter DeMarco, with nearly three decades of tax planning experience, is a Vice President at Meaden & Moore as well as Director of the Tax Services Group.