Tax Credit Could Prompt More Paid Family and Medical Leave
With the national unemployment rate dropping to the lowest levels in more than a decade, many dealerships are looking for new ways to attract and retain talented employees. The Tax Cuts and Jobs Act (TCJA) may offer such an opportunity.
The TCJA introduces a new tax credit for businesses that voluntarily offer paid family and medical leave to their employees. This tax break could make it more affordable for you to provide this employee benefit to your workers. And that, in turn, could make it easier to hire and retain employees in a competitive hiring market.
What’s it all about?
The details of the employer credit for paid family and medical leave are spelled out in Section 45S of the Internal Revenue Code. To qualify for the credit, your dealership must voluntarily offer paid family and medical leave. And you must create a written policy stating that full-time employees receive these benefits for at least two weeks a year and part-time employees receive them for a prorated period.
You may be eligible to take the credit based on up to 12 weeks of paid leave. You may offer more than 12 weeks, of course, although there is no credit available for amounts paid beyond 12 weeks.
To qualify for the benefits, employees must have been employed by your dealership for at least one year. And they must have been paid 60% or less of the highly compensated employee (HCE) dollar amount in the prior year. For 2017, the HCE amount was $120,000. Thus, for an employee to qualify he or she must not have been paid more than $72,000 last year.
A wide range of activities or events qualify as family and medical leave, including:
• An employee’s serious health condition that renders the employee unable to perform his or her regular job duties,
• An employee’s pregnancy and parental or bonding leave after a child is born,
• A serious health condition suffered by an employee’s family member for whom the employee is providing care, and
• A serious health condition or injury suffered by a family member who is in the armed forces and for whom the employee is providing care.
Only wages paid in relation to your written policy about paid family and medical leave are eligible for the tax credit. Vacation and sick leave pay, as well as other forms of paid time off, doesn’t qualify.
How much is the credit?
The employer credit for paid family and medical leave is equal to 12.5% of the wages paid for leave, if these payments constitute at least 50% of the employee’s normal wages. The credit amount increases to a maximum of 25% of the wages paid for leave, if these payments exceed 50% of the employee’s normal wages.
Specifically, the credit is increased by 0.25 percentage points for each percentage point by which the amount of wages paid for leave exceeds 50% of normal wages (up to the 25% limit).
So how much could your dealership save by taking advantage of this tax credit? Suppose you grant a total of 50 weeks of paid family and medical leave to 10 qualifying employees this year and pay each of these employees 50% of their normal wages. If these employees earn an average of $800 a week, your tax credit would equal $12,500.
Sunset in sight
The employer credit for paid family and medical leave is scheduled to sunset at the end of 2019. Thus, it’s available only for wages paid in tax years beginning after December 31, 2017, and before January 1, 2020.
Talk to your tax advisor if you have questions about how your dealership might qualify for this tax credit and to learn additional details.