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Employer Tax Credit for Paid Family and Medical Leave
The employer credit for paid family and medical leave
local law. Thus, this tax incentive does not reduce the cost
(Internal Revenue Code [IRC] §45S) was enacted as part of
of providing leave in jurisdictions where employers are
the 2017 tax revision (P.L. 115-97) (commonly referenced
required to do so by a state or local authority.
as the “Tax Cuts and Jobs Act,” or TCJA, the title of the
House-passed version of the bill). When enacted, this credit
A tax credit can only be claimed for wages paid for family
was made available for two years, 2018 and 2019. The
and medical leave. If an employer provides paid leave (e.g.,
credit’s primary sponsor, Senator Deb Fischer, called this
vacation, personal, or sick leave) that is not specifically set
credit a “two-year pilot program,” after which there would
aside for a FMLA-qualifying purpose, that leave is not
be an opportunity to evaluate whether the credit was
considered FML leave. Family and medical leave is
achieving its intended goals. This In Focus (1) provides an
restricted to leave associated with (1) the birth of a child or
overview of the employer credit for paid family and
placement of an adopted or foster child with the employee;
medical leave; and (2) highlights some issues to consider
(2) a serious health condition of the employee or the
when evaluating the credit.
employee’s spouse, child, or parent; (3) an exigency arising
out of the fact that a close relative is a member of the armed
The Employer Credit for Paid Family
forces and on covered active duty; or (4) to care for a
and Medical Leave
covered service member who is a close relative of the
The employer credit for paid family and medical leave
employee.
(FML) can be claimed by employers providing paid leave
(wages) to employees under the Family and Medical Leave
For employers, there are other requirements associated with
Act of 1993 (FMLA; P.L. 103-3). The credit can be claimed
the credit. To claim the credit, an employer must have a
for wages paid during tax years that begin in 2018 and
written family and medical leave policy in effect. The
2019.
policy cannot exclude certain classifications of employees
(e.g., unionized employees). Additionally, a qualified
The credit rate depends on how much employers provide
employer is required to claim the credit, unless the
for paid FML, relative to wages normally paid. If paid leave
employer opts out. For employers, the amount of wages and
is 50% of wages normally paid to an employee, the tax
salaries deducted as a business expense is reduced by the
credit is 12.5% of wages paid. If paid leave is 100% of
amount of credit claimed. Further, the credit cannot be
wages normally paid to an employee, the tax credit is 25%
claimed if wages have been used to calculate another tax
of wages paid. The credit rate increases from 12.5% to 25%
credit (to avoid a double tax benefit). The credit is part of
ratably as leave wages increase from 50% to 100% of
the general business credit, meaning that unused credits
wages normally paid. No credit can be claimed for paid
from the current tax year can be carried back one year
FML that is less than 50% of wages normally paid. Further,
(offsetting the prior year’s tax liability) or carried forward
no credit can be claimed for wages paid on leave that
up to 20 years to offset future tax liability. The credit is
exceed an employee’s normal wage rate.
allowed against the alternative minimum tax (AMT).
The credit can only be claimed for paid FML provided to
Legislative Background
certain lower-compensated employees. For wages paid to
The employer credit for paid family and medical leave was
an employee to be credit eligible, compensation to the
added to the IRC in P.L. 115-97. In the 115th Congress, the
employee in the preceding year cannot exceed 60% of a
House and Senate each passed their own versions of the
“highly compensated employee” threshold. For 2018,
Tax Cuts and Jobs Act. The House version did not contain a
employee compensation in 2017 cannot have exceeded
credit for paid family and medical leave. The credit was
$72,000. Further, for an employer to claim a credit for
introduced in the Senate amendment, and the Conference
wages paid to an employee, the employee must have been
Agreement followed the Senate amendment. The Strong
employed by the employer for at least 12 months.
Families Act (S. 1716) in the 115th Congress and earlier
proposals of the same title proposed a similar tax credit.
The amount of paid FML wages for which the credit is
claimed cannot exceed 12 weeks per employee per year.
Revenue Loss of the Credit
Further, all qualifying employees must be provided at least
The Joint Committee on Taxation (JCT) estimated that this
two weeks of paid FML for an employer to be able to claim
credit will reduce federal revenue by $4.3 billion between
the credit (the two-week period is proportionally adjusted
FY2018 and FY2027. Most of the revenue loss is in
for part-time employees).
FY2019 and FY2020, as the credit currently expires at the
end of calendar year 2019 (see Figure 1). Revenue losses,
Tax credits cannot be claimed for leave paid by state or
however, are expected beyond FY2020 as businesses carry
local governments, or for leave that is required by state or
forward unused credits from 2018 and 2019 to offset future
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Employer Tax Credit for Paid Family and Medical Leave
tax liability. Extending the provision through the 10-year
adoption of a child or for their own serious health
budget window (FY2019-FY2028) would result in revenue
condition, or that of a close relative.
losses of $22.0 billion, according to the Congressional
Budget Office (CBO).
Will the Credit Increase Paid Leave?
Providing a tax credit for employers that provide paid FML
Figure 1. Annual Revenue Loss of Employer Credit for
should, on the face of it, tend to increase access to this
Paid Family and Medical Leave
benefit. How effective the credit will be at achieving this
FY2018-FY2028
goal remains an open question.
Will the credit, as currently structured, provide a large
enough incentive to cause employers to change their
behavior (e.g., provide a benefit they do not currently
provide)? If the credit itself does not motivate employers to
provide paid FML, then employers that provide paid FML
for other reasons may receive a “windfall” in reduced tax
liability. Currently, large employers and employers of
management and professional employees are most likely to
provide paid family leave. Employers of management and
professional employees, however, are less likely to have
large shares of employees below the wage threshold.
Sources: JCT and CBO.
Employers that provide paid FML to qualified employees
Policy Considerations
for other reasons, such as to attract high-quality talent, will
be able to claim the credit even though their benefit policies
The employer credit for paid FML is targeted at a group
that is less likely to have access to paid family leave: low-
have not changed. If most of the credit’s beneficiaries are
employers that would have provided paid FML without the
and moderate-income workers. In 2018, 17% of all workers
credit, then the credit is not a particularly efficient
had access to paid family leave. However, in 2018, 28% of
mechanism for increasing paid FML.
workers in the top 25% of wage earners had access to paid
family leave. For those in the lowest 25% of wage earners,
There is also the possibility that employers choose to
8% had access to paid family leave. For background, see
CRS Report R44835, Paid Family Leave in the United
substitute credit-eligible paid FML for other forms of leave.
States, by Sarah A. Donovan.
An employer could reduce the amount of paid sick,
personal, or vacation time off, knowing that employees use
The share of workers with access to paid family leave has
this time for paid family and medical leave purposes. By
making this choice, when employees take leave for FMLA
increased in recent years (see Figure 2). Access to paid
purposes, the employer would be allowed a tax credit. If
family leave has increased across all income groups, but
there remains a gap in paid family leave benefits between
other benefits are scaled back in favor of tax-preferred
lower- and higher-wage workers.
FMLA leave, employees may not be better off.
Figure 2. Paid Family Leave by Wage Category
Options Related to the Current Employer Credit
2010-2018
There are several policy options for the employer credit for
paid family and medical leave. First, the credit could be
allowed to expire as scheduled. Second, the credit could be
extended. Third, the credit could be made permanent. Any
extension of the credit could also include a range of
potential modifications.
A possible rationale for extending the credit is that the two-
year window under current law provides limited
opportunity for evaluation. Over time, one way to examine
whether the credit has been effective could be to look at the
gap in paid leave benefits between lower- and higher-wage
workers. As shown in Figure 2, this gap has persisted, even
as more workers have access to paid leave.
Any extension of the credit will reduce federal tax
revenues, all things equal. A permanent extension of the
Source: Bureau of Labor Statistics (BLS).
credit could be expected to reduce revenues by about $22
Notes: Average hourly wages are $13.18, $19.87, and $31.55 at the
billion. As discussed above, an issue to consider is how
25th, 50th, and 75th percentiles, respectively, in 2018.
much of this $22 billion is claimed by taxpayers that would
not have provided paid family leave without the tax
Some workers who do not have paid family and medical
incentive.
leave may be able to use other forms of paid leave (e.g.,
paid vacation, sick, or personal leave) following the birth or
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Employer Tax Credit for Paid Family and Medical Leave
IF11141
Molly F. Sherlock, Specialist in Public Finance
Disclaimer
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