Leave Without Getting Lost: Your Road Map to the New Employer Tax Credit for FMLA Leave

October 18, 2018

The FMLA tax credit - what is it? Learn what it is and what it covers, what the requirements are, and if it applies to your business!

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FMLA Tax Credit image 4Most people have a family in some capacity. Even though some of us might not always feel especially close with our family, all it takes is something unexpected happening to a family member, and we are on the next flight out to help take care of things. It might be a new baby in the family, someone has been in an accident, or someone is terminally ill. Whatever the situation, most of us would not hesitate to do what we must to arrive on the scene to show our support and offer a hand.

While it’s noble to make family our top priority, business must go on, even if someone is out of the office. For this reason, business owners are careful to find someone to step in when an associate is out for a leave of absence. Everyone recognizes it’s not ideal to interrupt workflow.

After all, the dollar is king, so interrupting workflow means interrupting cash flow.  With this in mind, sometimes employees worry that taking a leave of absence will adversely affect their employment. This can add stress to an already stressful time for the employee.

That is where the Department of Labor steps in by the enactment of FMLA (the Family Medical Leave Act).

What is FMLA?

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During the Clinton administration, workforce management landed under the microscope. Especially considering the economic boom in which we witnessed increased female representation into the workforce.  More women were entering the job market, but the duties women performed at home did not abruptly cease to exist.

The duties required to run a household and care for family remained ever-present and consistently demanding.  Therefore, the U.S. Department of Labor enacted FMLA in 1993 to protect employees’ jobs.  They’re protected should they be absent due to any of the following circumstances:

This law intended to add a legal component to the concept you hear many employers preach about—work-life balance.

Work-life balance is intended to encourage employees to feel permitted to do the things they need to do, within reason, to meet the needs of their families, while remaining employed.  This allowed men and women to feel justified in prioritizing their families’ needs, without risking their employment.

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For FMLA coverage eligibility, the employee must have worked for their place of business for at least 12 months. They must also have clocked no fewer than 1,250 hours over that 12-month period.

One thing to know is that typically their place of business is required to follow the FMLA if they employ at least 50 people within a 75-mile radius, although some small companies are still required to abide by the FMLA.

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In other words, the employee must be a regular full-time employee and be working for a medium-sized or large company.  While the law does cover both public and private companies, certain members of the organization are excluded from coverage.  The law does not include elected officials and their staff members.

What is the New Employer FMLA Tax Credit?

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Some employers highlight any perk (also known as fringe benefits) available and are ready and willing to recognize FMLA (some even offer paid benefits) to their employees who must take a leave of absence.  While all employers who meet the criteria for providing FMLA must make it available to eligible employees, it is not surprising that some employers are not as eager to pay a portion of wages during a leave of absence.

Some employers simply do not want (or are operating on such slim margins that it makes it difficult) to spend money on people who are not currently performing a task for their company.  They might feel resentful that they have to focus on finding someone to fill an interim role or redistribute the workload while an employee is out.

So, how do employers benefit?

The government offers a little quid pro quo.  The government says, “Hey, if you pay your employees who are on leave, we will compensate you for the added time, money, and effort you must put into their absence.”  Thus was born the Employer Tax Credit for FMLA.

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Steven Harris, Managing Partner & Operations Executive, Journey Employer Solutions Arizona

Steven Harris, Managing Partner of Journey AZ breaks it down further:

Anytime a new tax credit becomes available, it’s always a good idea to look into it for your business.  Typically, these are put in place as an employer benefit or incentive to take care of your employees.  After all, employees are your biggest assets for your business.  The new FMLA tax credit is just another new benefit employers can take advantage of, while their employees take care of their personal matters.

The new FMLA tax credit (signed at the end of December in 2017) is a limited-time federal tax credit for employers who provide paid leave for FMLA from 2018 through the end of 2019.  The credit provided to employers has a range of 12.5-25% of the wages paid to an employee while on leave.

The amount of the employee’s wages replaced by the benefit determines the actual tax credit issued to the employer.  While this tax credit is currently a temporary provision, if widely embraced, it could find a permanent place in the legislature.

Who is eligible for the FMLA tax credit?

Now, eligibility requirements for the Employer Tax Credit for FMLA begin the same way for FMLA:  if a company employs at least 50 people within a 75-mile radius, they are bound to the FMLA.

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Integrated and joint employers (those with common management, ownership, or financial control, among other attributes), as well as employers with a fluctuating worker base (those who have at least 50 employees during 20 workweeks in the past or current year), might also have to follow the FMLA.

Employers need to make sure to maintain a written policy on the details of FMLA benefits for their employees.  The policy needs to include a couple of line items, including a minimum of two weeks annually of paid FMLA, and that the paid wages are at least 50% of the employee’s regular wages.  The FMLA benefits are not applicable to employees who earned more than $72,000 in 2017.

What are the restrictions of the credit?

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As with any provision provided by the government, employers should be aware of restrictions on the Employer FMLA Tax Credit.  Most notably, an employer cannot double-dip on taxes.

This means that if an employer claims wages paid for FMLA, they must reduce the deduction by the amount of the tax credit they received.  Also, the company cannot use other business wages paid in order to determine the FMLA credit.  So, if a business paid sick time wages, those cannot be counted as FMLA wages.  Further restrictions are yet to be determined.

Why the grey area?

While the new Employer FMLA Tax Credit is actively in place, there are still many unanswered questions.  We don’t know the full extent of the restrictions, nor what the penalties are for not adhering to the law.

Until further notice, employers may reference the IRS website for FAQs regarding the Employer Tax Credit for FMLA.  In the meantime, it’s good to remember to seek out ways to entice employees to work for your company.

At the same time, you can keep an eye on the bottom line!  Paying FMLA wages will encourage work-life balance, and can also earn your company a tax credit. 

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