The Family and Medical Leave Act (FMLA) of 1993 has been around long enough that most employers are familiar with it. But are you aware of the FMLA tax credit enacted as part of the GOP tax reform bill signed into law in December 2017? Many employers are not.
Ignorance surrounding this new tax credit illustrates why we encourage employers to contract with companies like BenefitMall to handle payroll. We make it our business to stay abreast of federal and state laws so that companies do not miss out on things like the FMLA tax credit. If your company is required under the FMLA to provide protected leave to qualifying employees, you might also qualify for the tax credit.
The FMLA was signed into law by President Bill Clinton on February 5, 1993. The intent of the law was to guarantee that employees would not be in danger of losing their jobs should they need to take time away from work to care for a sick family member, take care of themselves, or spend time at home following the birth of a child.
Under the law, employers with an average of 50 or more workers employed for at least 20 weeks during the current or prior calendar year must provide up to 12 weeks of protected leave to qualified employees. This leave only applies to specific scenarios as described above. To be protected, leave must be taken to:
- handle matters relating to the birth or adoption of a child;
- care for a seriously ill family member; or
- receive care for one's own serious illness.
Federal law does not require employers to pay workers for FMLA time. However, Congress included the FMLA tax credit in their 2017 tax overhaul to encourage employers to do so. The tax credit allows employers to recover some of what they voluntarily pay for protected leave.
The FMLA Tax Credit
The first thing to understand in relation to the FMLA tax credit is the difference between a tax credit and a write off. A tax credit is an amount of money that offset a company's tax liability. A write off is an amount applied against a company's taxable income.
Tax credits are advantageous in that they directly reduce tax bills. If a company owed $10,000 in taxes but had a $1,000 tax credit, the total amount due would be $9,000. On the other hand, a write off only reduces taxable income. So let's say a company finished the year with $500,000 in taxable income and $10,000 in write-offs. Subtracting the write-offs from the taxable income would result in a total amount of $490,000 subject to taxes.
With that out of the way, let us discuss the FMLA tax credit. Through 2019 (when the tax credit expires) employers can claim a credit of 12.5% of the total wages paid to employee taking protected time off. An additional 0.25% can be taken for every percentage point of pay in excess of 50% of the worker's normal pay.
In order to qualify for the tax credit, there are some conditions that have to be met. Rather than list them here, we recommend you seek the advice of a tax professional to learn if your company qualifies for the tax credit.
The FMLA and its associated tax credit represent yet two more reasons for contracting your payroll to a third-party provider like BenefitMall. We have known about the tax credit since it was made law late in 2017. Staying ahead of these things is just what we do.