Maternity Leave & Taxes: How Having A 2017 Baby Can Affect Your Tax Outcome
Taking time off work to have a baby requires a lot of advanced planning. You wrap up big projects, you hand off key assignments, and you work with HR on your return date. That's not to mention all of the vital, emotionally draining parenting decisions you also have to make, like deciding who will watch your child when you return to work. As if that wasn't enough to worry about, there's one thing you might not have considered: how maternity leave will affect your taxes in 2018.
It's a complicated topic because it depends on your company's parental leave policy. There are only four countries in the entire world that don't legally require paid maternity leave, and sadly (though not surprisingly) the United States is one of them, according to Quartz. Because nothing is required by law, some companies will pay you just that — nothing — while you're out on maternity. Other companies offer a partially paid leave or in the rare cases, like Etsy, a fully paid 6-month leave, according Entrepreneur.
The only thing legally required, thanks to the Family Medical Leave Act (FMLA) is that your job will be protected for 12 weeks after childbirth, according to the United States Department of Labor. (Note: there are some exceptions to the rule, like if your company has less than 50 employees or if you've been with the company less than 12 months).
But back to taxes... let's run through a few different tax situations depending on some common maternity leave scenarios.
One of the most common scenarios is that your company will pay you for six weeks of maternity leave, even though you might decide to take the full 12 weeks you're legally allowed. Those six weeks paid are often covered by short-term disability insurance (yes, they deem recovery from childbirth a "disability"), according to Fairygodboss.
So are those short-term disability payments taxed? "If you receive disability benefits from your employer who has been paying insurance premiums, that is a taxable benefit. But if you’ve been paying for the disability insurance yourself, the benefits you receive are tax-free," reported Fairygodboss in the same article.
To complicate matters, if you take the additional six weeks unpaid leave you're allowed, your annual income will be lower, and thus you may face a different situation come tax time.
"Your employer withholds taxes from your paycheck based on your full yearly salary, even if you take unpaid time off to care for your new baby. This can result in excess withholding, meaning that your employer is withholding a higher amount in taxes from your paycheck than you will actually owe at the end of the year," explained NYC-based attorney, Shannon McNulty, in a previous interview with Romper.
The good news there is that you'll see the money again in the form of a tax refund, added McNulty.
Ok, one more maternity leave tax scenario for you: If you're one of the lucky ladies out there who receives a fully paid leave, you'll be largely unaffected come tax season. "Maternity leave pay funded by your employer is no different than your paycheck — so you will have to pay taxes on it just as you would on your regular salary," explained Fairygodboss. In a nutshell, it will be business as usual at tax time because your income and tax contributions were stable throughout your maternity leave.
All of this tax stuff is pretty dizzying, but just when we thought we had it figured out, President Trump had to go and pass a tax bill! The biggest change, when it comes to maternity leave, is that for the next two years, companies will have a tax incentive to offer paid leave, according to The New York Times. That means that if you were on the fence about getting pregnant, now's the time to take plunge — at least for financial purposes. The tax incentive for employers to offer paid leave is only good from 2018-2019, the article explained.
Check out Romper's new video series, Bearing The Motherload, where disagreeing parents from different sides of an issue sit down with a mediator and talk about how to support (and not judge) each other’s parenting perspectives. New episodes air Mondays on Facebook.