The IRS and U.S. Department of the Treasury (Treasury) recently released guidance regarding two provisions of the Tax Cuts and Jobs Act (TCJA) that affect employers and employees. As explored in this BKD Thoughtware® article, the enactment of the TCJA affects nearly every U.S. taxpayer—and employers and their employees are certainly no exception.
Employer Reimbursements for Employee Moving Expenses
On September 21, 2018, Notice 2018-75 was released to provide guidance related to employer reimbursements for employees’ moving expenses under Internal Revenue Code Section 132(g), as amended by the TCJA. The TCJA added §132(g)(2), which suspends the qualified moving expense reimbursement exclusion under §132(a)(6) for taxable years beginning after December 31, 2018, and before January 1, 2026, except in the case of a member of the U.S. armed forces on active duty who moves pursuant to a military order and incident to a permanent change of station.
The notice provides direction on the application of §132(g)(2) to employer reimbursements made in a taxable year beginning after December 31, 2017, for qualified moving expenses incurred in connection with a move that occurred prior to January 1, 2018. Section 132(g) defines the term “qualified moving expense reimbursement” as any amount received (directly or indirectly) by an individual from an employer as payment for (or reimbursement of) expenses that would be deductible as moving expenses under §217 if directly paid or incurred by the individual. The term doesn’t include any payment for, or reimbursement of, an expense actually deducted by the individual in a prior taxable year.
Notice 2018-75 clarifies that reimbursement payments made by an employer to an employee in 2018 for qualified moving expenses incurred in a prior year aren’t subject to federal income or employment taxes. The same is true for amounts paid to a moving company in 2018 for qualified moving services provided to an employee prior to 2018. To qualify, the reimbursements or payments must be work-related expenses that would’ve been deductible by the employee if they had been directly paid prior to January 1, 2018.
Employers that have included qualified moving expense reimbursements or payments made after December 31, 2017, for moves occurring before January 1, 2018, in an individual’s taxable wages may correct any overpayment of federal employment taxes by using either the adjustment process under §6413 (see Publication 15) or the refund claim process (see Form 941-X and the accompanying instructions).
Employer Credit for Paid Family & Medical Leave
The IRS and Treasury released Notice 2018-71 on September 24, 2018. Primarily using a question-and-answer format, this notice clarifies various aspects of the new employer tax credit for paid family and medical leave that’s available for wages paid through qualifying programs in tax years beginning after December 31, 2017, and before January 1, 2020. For the first taxable year beginning after December 31, 2017, if eligible employers make amendments to their existing programs that meet the eligibility requirements (defined below) by December 31, 2018, they may be eligible to claim the credit retroactive to the beginning of their 2018 tax year. In this case, retroactive leave payments must be made no later than the last day of the employer’s taxable year.
The guidance issued in Notice 2018-71 establishes that employer credit for paid family and medical leave is equal to a percentage of wages paid to qualifying employees while on leave. Treasury has adopted the guidelines established in the Family and Medical Leave Act of 1993 (FMLA), as amended, for purposes in which an employee may take family and medical leave.
To be eligible for the credit, employers must have a written policy in place that satisfies the following requirements:
- The policy provides all qualifying employees with at least two weeks of paid family and medical leave (prorated for part-time employees). A qualifying employee is one who has been employed with the employer for at least a year and wasn’t paid more than a specific amount (described below) during the preceding year.
- The policy must provide for payment of at least 50 percent of the employee’s normal wages for services performed.
- If the employer employs any qualifying employees who aren’t covered by Title I of the FMLA, the written policy must include “noninterference” language. The notice includes sample language employers may use in their written policies.
Notice 2018-71 also provides clarification regarding the calculation of the credit, including the application of special rules and limitations such as:
- Only paid family and medical leave provided to employees whose prior-year compensation was at or below a certain threshold will qualify. In general, for tax year 2018, the employee’s 2017 compensation from the employer must not have exceeded $72,000.
- The credit is equal to the product of the applicable percentage and the amount of wages paid to qualifying employees during any period in which the employees are on family and medical leave. The term “applicable percentage” means 12.5 percent, increased (but not above 25 percent) by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent.
- The amount of leave taken into account with respect to any qualifying employee for any taxable year may not exceed 12 weeks.
An employer’s written policy provides each qualifying employee with four weeks of annual paid family and medical leave at a rate of payment of 75 percent of the wages normally paid to the employee.
The rate of payment under the policy exceeds 50 percent by 25 percentage points; therefore, the base applicable percentage of 12.5 percent is increased by 6.25 percent (0.25 × 25) for an applicable credit percentage of 18.75 percent.
For more details on how these new provisions may affect your tax situation, contact Katie or your trusted BKD advisor.