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How to Calculate New Federal Paid Family Leave Tax Credit

By Megan G. Holstein
  • February 23, 2018

The Tax Cuts and Jobs Act of 2017 provides a tax credit to employers that voluntarily offer paid family and medical leave to employees.

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 pursuant to 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.

To determine if your company can take advantage of the paid family and medical leave tax credit, follow the four steps below.

Step 1

Review the company’s existing policies that include voluntary pay 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
  • Because of 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 the Jackson Lewis 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. The law provides a tax credit, that is, a dollar-for-dollar reduction in the company’s income tax obligation.

Jackson Lewis attorneys are available to answer inquiries regarding this new law.

©2018 Jackson Lewis P.C. This Update is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between Jackson Lewis and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. Reproduction in whole or in part is prohibited without the express written consent of Jackson Lewis.

This Update may be considered attorney advertising in some states. Furthermore, prior results do not guarantee a similar outcome.

Jackson Lewis P.C. represents management exclusively in workplace law and related litigation. Our attorneys are available to assist employers in their compliance efforts and to represent employers in matters before state and federal courts and administrative agencies. For more information, please contact the attorney(s) listed or the Jackson Lewis attorney with whom you regularly work.

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