Tax Reform includes Family and Medical Leave Changes
The Paid Family and Medical Leave credit is a brand new non-refundable general business credit. It applies to businesses with 50 employees or more. There are several requirements in this article that will help employers navigate the changes of this employer credit.
John Tuzynsky is the Director of Exam Headquarters with the IRS. He gave a presentation in detail not too long ago on this very subject. He states, that there is $2.4 Trillion and of $3.4 Trillion of federal government revenue. US employers deposit this revenue through payroll, according to the IRS data book of 2017. That’s a lot of money!
How Will Corporations Report the Paid Family and Medical Leave Credit
The Form that the IRS has available for reporting the Paid Family and Medical Leave credit Form 3800. There is a draft of the Form 8994 to assist with the flow through for Form 3800. However, employers must be careful not to file the draft with the IRS until the Form 8994 is final. The Employer Credit for Paid Family and Medical Leave is to compute the credit that will flow to Form 3800. Partnerships and S Corps will report the credit to their partners and shareholders on the Schedule K. Instructions and a worksheet will help employers to calculate the credit.
How Long is the Paid Family and Medical Leave Credit Available?
Regarding the length of time, the credit applies for 2 years beginning tax years beginning after December 31, 2017 and expires for taxable years beginning after December 31, 2019. The credit basis is on wages paid to qualifying employees while on paid tax reform’s family and medical leave.
Paid Family and Medical Leave Credit Criteria
Employers must have a written policy in place that meets certain requirements. The first requirement is at least 2 weeks of annual paid family and medical leave to all qualifying employees who work full-time. For part-time employees, the employer may offer the leave on a prorate basis. And, second, the leave compensation must not be less than 50% of the wages that an employee consistently receives.
Do you have a mechanism in place to break out the Credit?
The credit is 2.5% of wage amount a qualifying employee receives while they are on Paid Family and Medical Leave. There is a limit of 12 weeks per taxable year, per employee. So as an employer, make sure you have a mechanism in place to assure that they only claim the credit for those 12 weeks.
PFML Credit Calculations
The minimum of the credit is 12.5% and will increase by .25% (one quarter of a percent) for each point by which the compensation amount exceeds 50% of the employees wages (at a maximum of 25%). So if you take the 50% times .25%, you result in the maximum credit which is 25% of an individual’s payments under the program. Therefore, in terms of additional qualifications, a qualifying employee is any employee under the Fair Labor Standards Act, who has been employed by an employer for 1 year or more and who for the preceding year had compensation that is no more than a certain amount. Please note that there is an adjustment to this annual figure and it’s based on IRC section 414.
Maximum Employee Earnings
Keep in mind that the Paid Family and Medical Leave credit includes earnings as well as other criteria. And, for an employer that’s claiming the wages paid to an employee in 2018, the employee earnings must not have been more than $72,000 in 2017. So this is another step that employers will need to take is to look back to their payroll for 2017 and there is no credit available if the employee made more than $72,000 in 2017. According to John Tuzynsky, says the number one question his office gets is, “Does an employer need to reduce its deduction for wages and salaries paid or incurred by the amount of the credit? The answer to that is “yes.”
There is another common question that his office gets. It is, “Can the wages that you take for the credit also be used to compute, like another general business credit, such as the research and experimentation credit?” The answer to that question is “no.” So there really is no double dipping possible when it comes to the amount of wages.
Paid Family Medical Leave Q&A Notice
To make this more clear, the IRS put out an easy to read notice on September 24, 2018. Notice 2018-71 that is set up in a question and answer format with additional guidance. This guidance covers areas with respect to when a written policy must be in place. And, How the FMLA credit relates to the employer’s medical leave. As well as, other various qualifications with respect to this credit? Employers and benefits professionals should read the notice that lists frequently common questions.
Questions About the Paid Family and Medical Leave Credit?
To recap this article for employers, remember the following: This new non-refundable General Business Credit is based on wages paid in 2018 and 2019. Next, have a policy be clear policy in place with full documentation. And, finally, take note that the Credit is only for 12 weeks per taxable year for the 2 years.
Call Alex Franch, BS EA. With tax season quickly approaching in a little over a month, we encourage you to be proactive and set up your appointment today! We are also offering a variety of client discounts to save you money.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning.
Sources and Resources
- Form 1099 Miscellaneous Filing Deadline
- IRS Tax Guidance: S Corporation Stockholder, Reasonable Compensation
- 12 Common Tax Problems to Avoid
- Tax Reform is Confusing Part 2
- Tax Reform is Confusing! Here is a Side by Side Comparison Part 1
- Learn About This Year-End Tax Strategy
- Natural Disaster Relief
- We Have a New Tax Preparation Office
- Emergency Savings: 67% of People Don’t Even Have $500 Emergency Fund
- Did You Donate to Charity?
- Don’t Expect the IRS to Take Your Word on Charitable Deductions – Substantiate
- Charitable Contribution: Tax Plan for Potential IRA-to-Charity Provision
- Home Office Tax Deduction Good or Bad?
- 529 Plan: Higher Education, Learning the Hard Way
- Minimizing Tax on Social Security Benefits
- Employee Business Expenses: Tax Reform Suspends Tax Deduction
- Preparing Taxes for 2018 and Beyond
Disclosure: This information was taken from the Tax Reform Basics for Employers Series and Joyn Tuzynsky, Director of Exam Headquarters with the IRS gave a presentation on this segment.
