How to Calculate the Paid-Leave Tax Credit

Rarely do HR professionals contribute to an employer's bottom line. But the new federal tax credit for employer-provided paid family and medical leave offers a unique opportunity to do just that and help reduce your company's tax liability.

The recently enacted Tax Cuts and Jobs Act provides a tax credit to employers that voluntarily offer paid family and medical leave to employees. Remember that this law provides a tax credit; that means it's a dollar-for-dollar reduction in the company's income tax obligation.

Under new Section 45S of the Internal Revenue Code, employers that voluntarily offer qualifying employees up to 12 weeks of paid family and medical leave annually under a written policy may claim a tax credit for a portion of the wages paid during leave. The leave benefit must satisfy the requirements in Section 45S.

A qualifying employee is one who has been employed by the employer for at least one year and is paid no more than 60 percent of the "highly compensated employee" dollar amount on an annual basis (i.e., $72,000 for 2018).

The credit sunsets at the end of 2019 unless reinstated by Congress. Further, the credit does not apply if paid leave is mandated by state or local law.

[SHRM members-only guide How to Develop and Administer Paid-Leave Programs]

Four Steps to Take

Follow these four steps to determine if your company can take advantage of the paid family and medical leave tax credit. No employer is too big or too small to receive this tax credit—employers of all sizes are eligible.

Step 1
Review the company's existing policies that include voluntary paid-leave benefits (i.e., pay that is not required by law), such as a salary-continuation disability policy or a parental-leave policy. If the company provides paid time off for any of the following reasons, then move to Step 2:

• Employee's serious health condition, including pregnancy.
  
• Parental leave or bonding leave.
  
• Care of a family member with a serious health condition.
  
• Care of an injured service member.
  
• A qualifying exigency that arises when a family member is deployed abroad on active military duty.
  

Step 2
Determine the company's 2017 income replacement dollar amount that was used to pay out under one or all of the policies listed in Step 1. This is used to calculate a 2018 tax credit in Step 3.

Step 3
Estimate the potential annual tax savings using a Paid Family Leave Tax Credit Calculator.

Step 4
If the estimated calculation is a positive amount, then consult with counsel to ensure your policy complies with Section 45S before relying on the credit.

Employers without existing voluntary pay leave benefits may consider offering enhanced benefits, such as paid parental leave, to take advantage of the tax credit. It's worth looking into in order to take advantage of potential tax savings the company's voluntary paid-leave program can generate. 

Megan Holstein is a principal in the Denver office of Jackson Lewis P.C. Her practice focuses on disability, leave of absence, workplace accommodations and health management issues. © 2018 Jackson Lewis. All rights reserved. Reposted with permission.

Related SHRM Article:

Taking Advantage of the Federal Paid-Leave Tax Credit, SHRM Online Benefits, January 2018 

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