On September 24, 2018, the IRS issued Notice 2018-71 (Notice) on the temporary employer tax credit introduced by the Tax Cuts and Jobs Act for wages paid to Qualifying Employees while on covered family or medical leave under new Section 45S of the Internal Revenue Code (Code).

In brief:

Where the requirements of the Notice are met, the new credit may be claimed during tax years 2018 and 2019 for paid family and medical leave provided to employees whose prior year compensation was at or below a certain amount ($72,000 for 2018). Eligible employers who establish qualifying paid leave programs or amend existing programs by December 31, 2018, may claim the credit, retroactive to the beginning of the employer’s 2018 tax year for paid leave provided during the year pursuant to the program.

Notice 2018-71’s Guidance:

The credit under Section 45S is equal to 12.5% of wages paid to a Qualifying Employee while on leave for up to 12 weeks in a tax year for a purpose that is protected by the Family and Medical Leave Act of 1993 (FMLA) and receiving 50% of normal wages. The amount of the credit is increased by 0.25% for each percentage point by which the rate of paid leave exceeds 50% of normal wages, up to a maximum credit of 25% where a Qualifying Employee receives 100% of his or her normal pay while on leave.

As explained by the Notice, to claim the credit, an employer must have a written policy that:

  1. Covers all employees who have been employed for one year or more and were paid not more than 60% of the threshold for highly compensated employees under Code Section 414(q) in the preceding year (i.e., $72,000 for 2018) (Qualifying Employees);
  2. Provides at least two weeks of annual paid family and medical leave for each full-time Qualifying Employee and a proportionate amount of leave for each part-time employee;
  3. Provides payment of at least 50% of a Qualifying Employee’s normal wages while on leave (“normal wages” generally excludes overtime and discretionary bonuses); and
  4. Includes specified “non-interference” language if the employer has Qualifying Employees who are not covered by title I of FMLA (e.g., employees working fewer than 1,250 hours per year), whereby the employer commits not to interfere in any way with a Qualifying Employee’s exercise of paid leave rights under the policy. (Sample language is provided.)

Points to Note:

Where an employer provides paid leave for both FMLA purposes and other purposes (e.g., vacation or personal leave), the written policy must specifically designate the leave provided for FMLA purposes in order to qualify for the credit for such leave. For example, a paid maternity or paternity leave policy that provides additional paid leave (over and above vacation, sick leave or other paid time off) would likely qualify.

Any leave paid by a State or local government or required by State or local law is not counted when determining whether an employer’s written policy provides a rate of payment of at least 50% of a Qualifying Employee’s normal wages. Therefore, in states such as California, New Jersey, New York and Rhode Island which provide State-funded paid family and/or medical leave that may be used for FMLA purposes, employers will need to provide 50% of normal wages on top of any State-funded amount to qualify for the credit.

In contrast, it appears that amounts paid by a third-party payer, such as an insurance company or a professional employer organization, will count as wages for purposes of the credit, but only the employer may take such wages into account in determining the credit.

An employer is not required to provide employees with notice of its paid family and medical leave policy, but if it chooses to do so, it must provide notice in a way reasonably designated to reach each Qualifying Employee.

The Notice ensures no “double-dipping” with respect to the credit as it confirms that any wages taken into account to determine any other business-related credit under Code Section 38 do not count as wages for purposes of the new Section 45S credit. Additionally, Code Section 280C denies a deduction for wages or salaries equal to the amount of the new credit.

Next Steps:

The IRS plans to incorporate the content of the Notice into proposed regulations and has requested comments by November 23, 2018 to assist in development of the regulations. In the meantime:

  • Employers that already provide paid leave for an FMLA purpose should consider adopting or amending their written policy to meet the requirements of the Notice by December 31, 2018, which will enable them to claim the credit for any qualifying leave provided since January 1, 2018 (as well as in 2019).
  • Employers that do not currently provide paid FMLA leave should consider whether the temporary credit under section 45S provides sufficient tax incentive for them to adopt a FMLA leave policy.

Anne Batter is a partner in Baker McKenzie's Tax Practice Group with over 35 years of tax experience. She focuses her practice on the tax treatment of executive compensation and fringe benefits arrangements. She also handles excise tax matters, particularly those involving the air transportation excise tax. She previously served as an attorney in the Income Tax & Accounting Division of the IRS’s Office of Chief Counsel and as attorney-advisor with the US Tax Court.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.