As a business owner, offering benefits that attract and retain employees while also maximizing tax savings is a win-win situation. One often-overlooked opportunity is the Employer Credit for Paid Family and Medical Leave (FMLA Credit). This tax incentive rewards businesses that implement a qualifying paid leave policy and compensate employees during their leave.
What Is the Employer Credit for Paid Family and Medical Leave?
The FMLA Credit is a temporary federal tax credit designed to encourage businesses to provide paid family and medical leave to their employees. If your business has a written policy in place that meets the IRS’s requirements, you may qualify for a credit ranging from 12.5% to 25% of the wages paid to employees while they are on FMLA leave.
How Does It Work?
To be eligible for the credit, an employer must:
Have a written policy in place that provides at least two weeks of paid family and medical leave annually to qualifying employees.
Pay employees at least 50% of their regular wages while on leave.
Offer this benefit to all qualifying full-time and part-time employees who meet the requirements of the Family and Medical Leave Act (FMLA).
The credit percentage starts at 12.5% if employees receive 50% of their normal wages and increases incrementally, up to 25%, as the wage replacement percentage rises.
A Simple Example of Potential Savings
Let’s assume your business implements a paid FMLA policy, and two employees take leave during the year:
Employee A is paid $1,000 per week and takes four weeks of paid leave.
Employee B is paid $800 per week and takes six weeks of paid leave.
Both employees receive 50% of their normal wages while on leave.
Total wages paid during leave:
Employee A: $1,000 x 50% x 4 weeks = $2,000
Employee B: $800 x 50% x 6 weeks = $2,400
Total qualifying wages paid: $4,400
Tax credit calculation at 12.5%:
$4,400 x 12.5% = $550 in tax savings
If your policy provided a higher percentage of regular wages, the credit would increase, up to a maximum of 25%.
Is This Credit Right for Your Business?
While this credit is an excellent incentive, it is more commonly utilized by businesses with structured employee benefits programs. If your business is growing and looking for ways to attract and retain employees, implementing a qualifying paid leave policy could be a valuable tool—especially if you can take advantage of this tax savings opportunity. However, it's important to note that this credit is currently scheduled to expire at the end of 2025 unless Congress extends it. Keeping an eye on legislative updates will help you determine if this benefit will remain available in future tax years.
Questions
If you’re interested in exploring whether this credit makes sense for your business, consider:
Reviewing your current leave policies.
Implementing a written policy that meets the IRS’s requirements.
Even if your business isn’t large enough to take advantage of this credit today, staying informed about potential tax-saving opportunities can help you plan for future growth. If you have any questions, please feel free to reach out to TrueBlaze Advisors