Tax credits are every business owner’s friend when it comes to saving money by reducing income taxes owed. Tax credits are not tax deductions; there is a difference. Tax deductions reduce taxable income, while tax credits reduce income taxes owed. Therefore, one area every business owner should peek into is that of business tax credits.  

As mentioned earlier, tax credits reduce a business’s taxes owed dollar-for-dollar. There are several different tax credits available for small businesses across the US. This month we look at The Family Medical Leave Tax Credit. The blog will briefly examine its purpose, requirements, and some limitations. Please note that the information shared in this blog presents only an overview of the tax credit. Please visit the IRS’s website for a more detailed understanding of the PFML tax credit.

 Purpose of The Paid Family Medical Leave Tax Credit 
The tax credit is offered to qualified business employers who offer their employees paid family and medical leave. The accompanying tax form for the credit is Form 8994.

For a business to qualify for the credit, it must meet certain IRS requirements, the business must have a written policy that includes –

  • At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full-time (prorated for employees who work part-time), and
  • The paid leave is not less than 50% of the wages normally paid to the employee.

The IRS defines a ‘qualified employee’ as, 
Any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain amount. For an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017.

 The credit is worth 12.5% of the wages paid to employees on qualifying family or medical leave throughout the tax year if you paid out at least 50% of their wages during the leave period. If the employer pays out more, the credit amount grows.

What Events Qualify for the Tax Credit? 
The IRS outlines six (6) specific events that qualify for the tax credit.

  1. Birth of an employee’s child and to care for the child.
  2. Placement of a child with the employee for adoption or foster care.
  3. To care for the employee’s spouse, child, or parent who has a serious health condition.
  4. A serious health condition that makes the employee unable to perform the functions of his or her position.
  5. Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
  6. To care for a service member who is the employee’s spouse, child, parent, or next of kin.

How Much of the Tax Credit Can Be Applied
The payout starts at 12.5%of wages paid to an employee. The maximum credit is 25% of paid wages if you paid 100% of the employee’s salary during their qualifying leave.

It is important to note the tax credit’s limitations. Two such limitations are:

  • The payroll amount deducted as a business expense is reduced by the amount of credit claimed.
  • The credit cannot be claimed if wages and salaries have been used to calculate another tax credit.

Ideal Small Business For the Tax Credit 
The credit is ideal for a small business with a growing staff who engage in 1 or more of the 6 events mentioned above that the IRS considers as “Family Paid Medical Leave” events.

The rules and calculations for the PFML tax credit can be confusing, especially around the rules and exceptions to them. Therefore, it is advisable to seek the assistance and expertise of a CPA, EA, or tax accountant.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.