Question-and-answer guidance issued on paid family and medical leave credit

On Sept. 24, the IRS issued 34 questions and answers on new Sec. 45S, which was added by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, to provide a general business credit for employers who provide paid family and medical leave to their employees (Notice 2018-71). The credit equals a percentage of the wages an employer pays employees while they are on paid family or medical leave. For purposes of the credit, the reasons an employee may take a family or medical leave are the same as those for which an employee may take a leave under Title I of the Family and Medical Leave Act of 1993 (FMLA), P.L. 103-3.

To claim the credit, an employer must have a written policy that satisfies the following requirements:

• The policy must cover all qualifying employees; that is, all employees who have been employed for a year or more and were paid not more than a specified amount during the preceding year, generally not more than $72,000 in 2017.
• The policy must provide at least two weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for each part-time qualifying employee.
• The policy must provide for payment of at least 50% of the qualifying employee’s wages while the employee is on leave.
• If an employer employs qualifying employees who are not covered by Title I of the FMLA, the employer’s written policy must include language providing “non-interference” protections, as described in Section A of Notice 2018-71. Thus, the written policy must incorporate the substantive rules that must be met for an employer to be eligible for the credit.

Any leave paid by a state or local government or required by state or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer.

For purposes of the credit, an employer is any person for whom an individual performs services as an employee under the usual common law rules applicable in determining the employer-employee relationship. Wages qualifying for the credit are determined under the Federal Unemployment Tax Act (FUTA) rules but disregarding the $7,000 FUTA wage limit.

The Q&As address the following topics: (1) Who is an eligible employer?; (2) What is family and medical leave?; (3) What are the minimum paid leave requirements to be eligible for the credit?; and (4) How to calculate and claim the credit.

The notice was effective Sept. 24, 2018, and applies to tax years beginning after Dec. 31, 2017, until Dec. 31, 2019. The contents of the notice will be incorporated into proposed regulations.