IRS Q&As cover credit for paid family, medical leave

Tax Hot Topics newsletterThe IRS recently issued Notice 2018-71 in a “question and answer” (Q&A) format regarding the newly enacted income tax credit under Section 45S for employer-paid family and medical leave (FML credit). In general, eligible employers are allowed an FML credit equal to 12.5% of wages paid to qualifying employees for family and medical leave. Employers must have a written policy in place that provides a minimum of two weeks of annual paid family and medical leave to qualifying full-time employees (prorated for part-time employees) at a pay rate of at least 50% of an employee’s normal wages. Other rates and limits may apply. The credit is only available for wages paid in taxable years 2018 and 2019.

Notice 2018-71 provides additional clarification on the FML credit with certain key topics noted below:

  • Timing of leave: Generally, the employer’s policy must be in place and meet the requirements of Section 45S before the paid family and medical leave for which the employer claims the credit is taken. A written policy is considered to be in place on the later of the policy’s adoption date or effective date (Q&A 5).
  • Retroactive policies: Employers may retroactively apply newly compliant policies under Section 45S provided (i) the policy (or amendment) is adopted on or before Dec. 31, 2018, and (ii) 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 (or amendment), including making retroactive leave payments no later than the last day of the taxable year (Q&A 6).
  • Short-term disability: Paid leave under an employer’s short-term disability program may be characterized as family and medical leave under Section 45S, provided such requirements are met (Q&A 11).
  • Uniform rates or leave periods: An employer’s policy may provide different rates of payment or periods of paid family and medical leave for different FMLA purposes, provided the minimum paid leave requirements with respect to each FMLA purpose are met (Q&A 20).
  • Tax-exempt organizations: Under Section 45S(g), wages are defined as FUTA wages pursuant to Section 3306(b), determined without regard to the $7,000 FUTA wage limitation. Therefore, only wages subject to FUTA are used to calculate the FML credit. Accordingly, tax-exempt entities are generally ineligible to claim the FML credit because wages paid by a tax-exempt entity are not subject to FUTA withholding (Q&A 24).
  • Claiming the credit: Provided all the Section 45S requirements are met, employers must file IRS Form 8994, Employer Credit for Paid Family and Medical Leave, and IRS Form 3800, General Business Credit, with its tax return to claim the credit (Q&A 31).
  • Employer aggregation: Employers may not be aggregated for purposes of calculating the FML credit. Employers are aggregated only for purposes of Section 45S(h)(1), which provides that a taxpayer may elect to have Section 45S not apply for any taxable year (Q&A 33).

Notice 2018-71 is effective as of Sept. 24, 2018, and applies to wages paid in taxable years beginning in 2018 and 2019.

Jeff Martin
Partner, Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director, Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate, Washington National Tax Office
T +1 202 861 4107

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