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Employer Credit for Paid Family & Medical Leave (IRC 45S)

Employer Credit for Paid Family & Medical Leave (IRC 45S)

The labor market is a tight space with talented workers making it a competing ground for companies. Thus, the tax system has tax credits to assist employers in providing for their families and medical leave. The Tax Cuts and Jobs Act of 2017 brought the benefits, and they are available until 2025. 

Such Act is responsible for the Employer Credit for Paid Family, and Medical Leave in Section 45s to assist employers with over 25% of their family upkeep and medical leave, as well as access to other benefits. 

Scope and Eligibility

The non-refundable tax credit is available to every employer regardless of organization size. However, such an individual must submit a written policy with the name of all eligible employees accessible to two weeks of paid family and medical leave each year. 

In addition, the employer pays more than 50% or more of the normal wage. Also, the benefit of the leave must fall under specific categories, like:

  • Providing care to a newborn child, newly fostered child, or recently adopted child;

  • Providing care for a married partner, child, or parent with critical health issues;

  • To get well from a critical illness that hinders the employee from working;

  • For those in the Armed Forces, the leave must be for the employee’s child, spouse, or parent of employees on active duty;

  • Providing care for the active duty employee’s child, spouse, parent, or next of kin.

The credit is available for claims and paid for 12 weeks, but it is only paid to employees that have worked for the employer for at least a year and earn below $78,000 annually. An employer that pays leave benefits is eligible for the credit. The credit works on any reasonable method to determine the employee’s eligibility and the amount paid as leave benefit.

In addition to the qualification, an employer must include specific non-discrimination and non-interference language in the written policy. The note is to alert the IRS that the employer has nothing to do with the benefits for those workers not under the Family and Medical Leave Act.

Calculating the Credit

The credit is a certain percentage of the qualifying employee’s wages paid during the period of 12 weeks when on family and medical leave. In essence, the amount paid to the employee should not be less than 50% of their actual wages paid for their services as an employee.

The credit has a 12.5% application to qualify employees’ wages for the tax year. In addition, the credit increases by 0.25% points for each increased point when the family and medical leave is more than 50% of the employee’s normal wages. To be clear; 

The maximum credit is 25% (12.5% + (50% × 0.25%)) of wages paid prior to the leave. Remember that the employee’s payment is 100% rate of the normal wages. However,

  • The credit depends on the employee’s working hours when taking family and medical leave multiplied by the hourly rate during normal working days.

  • The IRS is still formulating a non-hourly rate calculation; meanwhile, taxpayers can get their hourly wages from non-hourly jobs via any logical mathematical method.                     

Claiming the Tax Credit

The credit is up for grabs via the IRS Form 8994, also known as Employer Credit for Paid Family and Medical Leave. Also, it is available via General Business Credit, known as IRS Form 3800. Based on the policy agreement, you can use the formula of the total annual wage on the family and medical leave policy multiplied by 12.5% to 25%. 

However, depending on the credit amount, employers will exempt some deductions from qualifying for employee compensation. The credit is easy to claim, but record-keeping is essential to qualify for the leave and wages.



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