New Tax Incentive for Employers Providing Paid Family Medical Leave

The Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) recently released Notice 2018-71 (the “Notice”) which provided guidance on the Family and Medical Leave (“FML”) credit and announced the intention of the Treasury and the IRS to publish proposed regulations under Section 45S.  This guidance follows earlier guidance provided by the IRS in a FAQ and in IRS Tax Reform Tax Tip 2018-69, which was released on May 4, 2018.  This article provides an overview of the credit and the recently released guidance.

Overview of the Family Medical Leave Credit for Employers Under Section 45S

Initial Consideration: The Written Policy Requirement

To be eligible to claim the FML credit under newly enacted Section 45S for the 2018 tax year, an employer must satisfy the following criteria:

  • Maintain a written policy that covers all qualifying employees.
  • The written policy must provide at least two weeks of annual paid FML for each full-time qualifying employee, and at least a proportionate amount of leave for each part-time qualifying employee.
  • The written policy must provide for payment of at least 50 percent of the qualifying employee’s normal wages while the employee is on leave.
  • If an employer employs qualifying employees who are not covered by the Family and Medical Leave Act of 1993 (“FMLA”), the written policy must include language providing employees with non-interference protections.[1]

As detailed in the section that follows, each of these criteria entail requirements that a taxpayer must satisfy, as well as special rules that a taxpayer must consider in determining credit eligibility and the credit amount.  However, the initial consideration for an employer is whether it has a written policy in place.

The written policy may be set forth in a single document or in multiple documents.[2]  The employer’s written policy must be in place before the paid FML for which the employer claims the credit.[3]  Generally, the written policy is considered to be in place on the later of the policy’s adoption date or the policy’s effective date.[4]  

However, for an employer’s first taxable year beginning after December 31, 2017, a written leave policy or an amendment to a policy will be considered to be in place as of the effective date of the policy, rather than a later adoption date, if the employer meets the following criteria:

  • The policy or amendment is adopted on or before December 31, 2018; AND
  • The employer brings its leave practices into compliance with the terms of the retroactive policy or amendment for the entire period covered by the policy, including making retroactive leave payments no later than the last day of the taxable year.[5]

For example, a qualified employee takes two weeks of unpaid FML in January 2018.  On October 31, 2018, the employer adopts an amendment to its employee handbook, which institutes the written policy under Section 45S effective as of January 1, 2018.  If the employer retroactively pays the qualified employee 50 percent of his or her normal wages for the two weeks of FML leave, the employer has complied with the transition rule and may claim the FML credit for the retroactive payment on its 2018 tax return.

The employer does not need to provide notice to employees that it is has a written policy in place.[6]   However, if the employer does provide notice, it must do so in a manner that is designed to reach each qualifying employee, e.g. e-mail communication, internal website communication, employee written handbook, etc.[7]

Definitions and Credit Computation

Effective for wages paid after December 31, 2017 and before January 1, 2020, an “eligible employer” may claim the FML credit in an amount equal to an “applicable percentage” of wages paid to “qualifying employees” during any period in which such employees are on FML.[8]  The “applicable percentage” is defined as 12.5 percent.[9]  However, the 12.5 percent increases (to a maximum of 25 percent) by 0.25 percentage points for each percentage point by which the rate of payment paid during such FML exceeds 50 percent of wages normally paid to the employee.[10]

Wages are defined pursuant to Section 3306 (without regard to the $7,000 Federal Unemployment Tax Act wage limitation) and shall not include any wages taken into account for purposes of determining another credit.[11]  In addition, pursuant to Section 280C(a), an employer must reduce its deductions for wages or salaries paid or incurred by the amount determined as a credit. 

Section 45S(e)(1) defines “family and medical leave” as leave for any one or more of the purposes described in the FMLA:

  • The birth of an employee’s child and to care for the child;
  • The placement of a child with an employee for adoption or foster care;
  • An employee’s care for his or her spouse, child, or parent when such person has a serious health condition;
  • A serious health condition that makes the employee unable to perform the functions of the employee’s position;
  • Any qualifying exigency, as determined by the Secretary of Labor, arising out of an employee’s spouse’s, child’s, or parent’s membership in the Armed Forces, including the National Guard and Reserves, and who is on covered active duty or has been notified of impending call or order to covered active duty; or
  • Caring for a spouse, child, or parent who is a military service member who has a serious medical injury or illness (also applies to an employee who is the next of kin of such military member).[12]

If an employer provides leave as vacation leave, personal leave, or medical or sick leave (other than leave provided for under IRC 45S(e)(1)), that paid leave will not qualify for purposes of the credit.[13]

An employer does not need to be subject to the FMLA, e.g. employing 50 or more employees, to claim the credit.[14]   Rather, the employer need only ensure its written policy meets the previously discussed requirements.[15]    

An “eligible employer” is defined as any employer who has a written policy that provides not less than two weeks of annual paid FML to a non-part time qualifying employee, and in the case of a part-time qualifying employee provides an amount of annual paid leave that bears the same ratio to the amount provided to a non-part time employee.[16]    In addition, the rate of payment under the program may not be less than 50 percent of the wages normally paid to the respective qualifying employee for services performed for the employer.[17]  

A “qualifying employee” is any employee, as defined in Section 3(e) of the Fair Labor Standards Act of 1938, who has been employed by the employer for one year or more, and who had compensation in the preceding year that did not exceed an amount equal to 60 percent of the amount applicable for such year under Section 414(q)(1)(B)(i).[18]    For 2017, this amount was $120,000, and thus the employee wage limitation for the FML credit in 2018 is $72,000.

The amount of the credit with respect to any qualifying employee shall not exceed an amount equal to the product of the employee’s normal hourly wage rate and the number of hours for which the qualifying employee takes FML.[19]   If a qualifying employee receives a salary, as opposed to pay based on an hourly basis, the wages of such employee shall be prorated to an hourly wage rate for purposes of determining the limitation.[20]  Moreover, the amount of FML that may be taken into account for any respective qualifying employee shall not exceed 12 weeks.[21] 

Section 45S(c)(3) clarifies that all persons which are treated as a single employer under Section 52 of the Code shall be treated as a single taxpayer for purposes of the credit. 

Section 45S(c)(4) provides that any leave which is paid by a state or local government or required by state or local law shall not be considered in determining the amount of FML provided by the taxpayer.[22]    

Claiming the Credit

An eligible employer will claim the tax credit on its annual income tax return.  The employer must file Form 8994, Employer Credit for Paid Family and Medical Leave, with its return.  The taxpayer will then report the credit on Form 3800, General Business Credit.

Each member of a controlled group will make a separate election as whether to claim the credit or to forego the credit and not reduce applicable wage deductions.  However, in the case of a consolidated group, the election is made by the agent of the group.  


The Act provided a new general business credit for employers that comply with new Section 45S.  Prior to year-end, employers should evaluate their written policies regarding paid FML.  If the written policy does not currently comply with the requirements of Section 45S but is updated before January 1, 2019 to comply with the Code provision and Notice, the employer will have an opportunity for additional tax savings in 2018.  The benefit will also exist for the 2019 tax year.

For questions about this article, please contact Dan Laughlin at


[1] Notice 2018-71 provides an example of such “non-interference” language: “[Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy.  [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.”

[2] Notice 2018-71, pg. 5, Answer 4 (“[A]n employer may maintain different documents to cover different classifications of employees or different types of leave…written policy under section 45S also may be included in the same document that governs the employer’s other leave policies.”)

[3] Id. at 6, Answer 5.

[4] Id.

[5] Id. at 6, Answer 6.

[6] Id. at 7, Answer 7.

[7] Id.

[8] IRC § 45S(a)(1).

[9] IRC § 45S(a)(2).

[10] IRC § 45S(a)(1); IRC § 45S(c)(2).

[11] IRC § 45S(g).

[12] Id. at 8-9, Answer 8.

[13] IRC § 45S(e)(2).

[14] Notice 2018-71, pg. 3, Answer 1.

[15] Id. at 4, Answer 2.

[16] IRC § 45S(c)(1)(A).

[17] IRC § 45S(c)(1)(B).

[18] IRC § 45S(d).

[19] IRC § 45S(b)(1).

[20] IRC § 45S(b)(2).

[21] IRC § 45S(b)(3).

[22] IRC § 45S(c)(4).


Thought Leadership
Tax & Estate Planning Guide
Subscribe to Newsletter
Press Releases