New tax credit for paid family and medical leave

Through 2019, employers can recoup a portion of this prized employee benefit.
By Matthew Geiszler, Ph.D., and John McKinley, CPA, CGMA, J.D., LL.M.

New tax credit for paid family and medical leave
Photo by tifonimages/iStock

A new tax credit intended to help businesses reduce their taxes while an employee is on paid leave from his or her job duties due to specified reasons was enacted as part of the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Sec. 45S provides a general business credit (under Sec. 38) for employers that pay qualifying employees at least 50% of their salary while on family and medical leave for up to 12 weeks in a year.

Most businesses with at least 50 employees and most public-sector employers are subject to the Family and Medical Leave Act of 1993 (FMLA), P.L. 103-3, which requires them to provide employees, for specified reasons, up to 12 weeks during which employees retain group health benefits and after which they may return to their job. The FMLA does not require employers to pay employees any wages or salary during the leave, but some do. According to the 2017 National Compensation Survey: Employee Benefits in the United States, compiled by the U.S. Department of Labor's Bureau of Labor Statistics (available at, about 88% of employers offered unpaid family leave and 15% offered paid leave in March that year (with some employers offering both paid and unpaid leave). Employers that are subject to the FMLA are also required under those statutes to restore an employee to the position that he or she held prior to taking the leave or an equivalent position (29 U.S.C. §§2614(a)(1)(A) and (B)) and to maintain health benefits during the period the eligible employee is on leave (29 U.S.C. §2614(c)(1)).

The new tax credit under Sec. 45S is available to eligible employers both subject to the FMLA and exempt from it, with some additional requirements in the latter case and the requirement of a written plan containing certain specified provisions in either case. For employers currently offering paid family leave, the new credit may provide an immediate benefit. The credit, however, is available only for the 2018 and 2019 tax years, which may limit its effectiveness as an incentive for employers to begin offering paid leave.

It is important for CPA tax practitioners to understand the nuances of the family and medical leave credit before the 2018 filing season. In particular, practitioners should be aware of how to calculate the credit, which employers are eligible to claim it, which employees qualify for it, and what qualifies as family and medical leave. The IRS posted frequently asked questions (FAQs) on its website on May 22, 2018, summarizing the provisions. Then, on Sept. 24, 2018, the Service issued Notice 2018-71, providing preliminary guidance on a number of aspects of the credit and stating it intended to issue proposed regulations.


The family and medical leave credit amount equals an applicable percentage of the amount of wages paid to qualifying employees by an eligible employer during a period of up to 12 weeks when the employees are on family and medical leave (Secs. 45S(a)(1) and (b)(3)). The wages paid to an employee on leave must equal or exceed 50% of the employee's normal wages, up to 100% of normal wages (Sec. 45S(c)(1)(B)).

The credit's applicable percentage is 12.5% of wages paid to qualifying employees on family and medical leave during the tax year, increased by 0.25 percentage points for each percentage point by which the wages paid for family and medical leave exceed 50% of the employees' normal wages. Therefore, the maximum credit is 25% (12.5% + [50% × 0.25%]) of wages paid for which leave is taken, where those wages are paid at a rate equal to 100% of an employee's normal wages (Sec. 45S(a)(2)). The credit is limited to each employee's number of hours for which family and medical leave is taken, multiplied by that employee's normal hourly rate of pay when providing services to the employer (Sec. 45S(b)(1)). A method for converting a nonhourly rate to hourly will be established by future IRS regulations (Sec. 45S(b)(2)). Until then, employers may use any reasonable method to convert nonhourly wages to an hourly rate (Notice 2018-71, Q&A 32).

Employers must also reduce the amount of any deduction claimed for wages and salaries paid during the year (and reduce any other wage-based general business credit component claimed) by the amount of the family and medical leave credit (Secs. 38 and 280C(a)). "Wages" has the same meaning as under Sec. 3306(b) (without regard to any dollar limitations) (Sec. 45S(g)).

If an employer chooses not to comply with the requirements of Sec. 45S, no other legal remedies or penalties will be brought or inferred against the employer other than ineligibility for or recapture of the credit (Sec. 45S(c)(5)).


An employer eligible for the credit is one with a written policy in place that requires the employer to provide at least two weeks annually of paid family and medical leave to qualifying employees other than part-time employees (Sec. 45S(c)(1)(A)). The two-week requirement is prorated for part-time employees (those working less than 30 hours per week) by the ratio of the weekly hours they are expected to work to those of an "equivalent" full-time employee. For example, the written policy would need to provide part-time employees working 25 hours a week 1.25 weeks of paid family and medical leave, if the policy offers the minimum allowable two weeks' paid leave to equivalent qualifying employees who are expected to work 40 hours a week (for an example of how this calculation works, see "Formula for Prorated Leave for a Part-Time Employee").

Formula for prorated leave for a part-time employee


While this ratio may seem fairly straightforward, significant questions remain, including the definition of an "equivalent" qualifying employee; on what basis work hours are "expected," particularly for employees with nonweekly or irregular work schedules; and how to calculate the amount of wages "normally paid." The IRS has said that "[o]vertime (other than regularly-scheduled overtime) and discretionary bonuses are excluded from wages normally paid" (Notice 2018-71, Q&A 19). Until further guidance is issued, the IRS has said that, for employees paid on a basis other than salaried or at an hourly rate, employers should use the regulations under the Fair Labor Standards Act of 1938 (FLSA) to determine employees' regular rate of pay (id.).

A transition rule allows a written leave policy or an amendment to it adopted by the end of 2018 to be considered in place as of a retroactive effective date in 2018, as long as the employer brings its leave practices into compliance with the terms of the policy or the amendment for the entire period it covers and makes any retroactive leave payments no later than the end of the employer's tax year (Notice 2018-71, Q&A 6).

Sec. 45S(c)(3) states that all persons treated as a single employer under Secs. 52(a) and (b) will be treated as a single taxpayer for purposes of the family and medical leave credit.

A special rule applies under Sec. 45S(c)(2) to "added" employers and "added" employees under Sec. 45S, meaning qualifying employees who are not subject to Title I of the FMLA and eligible employers that offer paid family and medical leave to added employees (whether or not the employer is subject to Title I of the FMLA). An added employer's written leave plan must ensure that the employer will not interfere with, restrain, or deny an employee's exercise or attempt to exercise his or her rights under the policy, as well as not discharge or discriminate against any individual "for opposing any practice prohibited by the policy" (Sec. 45S(c)(2)(A)).


A qualifying employee for purposes of Sec. 45S has the same meaning as under Section 3(e) of the FLSA (Sec. 45S(d)). The employee must have worked for the employer for one year or more and not be considered a highly compensated employee for the preceding year (Secs. 45S(d)(1) and (2)). Title I of the FMLA also applies to employees employed for at least 12 months and does not require the period to be consecutive (29 U.S.C. §2611(2)(A)(i)). The IRS has said that, until further guidance is issued, employers may use any reasonable method to determine whether an employee has been employed for one year or more, but a requirement that an employee work 12 consecutive months to qualify would not be a reasonable method (Notice 2018-71, Q&A 13). Also, although under the FMLA, the employee must have worked at least 1,250 hours in the 12 months preceding the start of family and medical leave (29 U.S.C. §2611(2)(A)(ii)), the IRS has stated that Sec. 45S does not require an employee to work a minimum number of hours per year to be a qualifying employee (Notice 2018-71, Q&A 14).

A highly compensated employee is any employee paid more than 60% of the applicable amount under Sec. 414(q)(1)(B) (Sec. 45S(d)(2)). The applicable amount for 2017 and 2018 is $120,000, which means that any employee making more than $72,000 ($120,000 × 60%) will be considered highly compensated and thus not a qualifying employee for purposes of the credit.


Next, practitioners, as well as taxpayers, must determine what counts as family and medical leave to ascertain whether an employer's leave policy meets the two- and 12-week requirements. Family and medical leave has the same definition as under FMLA Sections 102(a)(1)(A)−(E) and (3) (Sec. 45S(e)(1)). Thus, leave can be claimed for any of the following reasons (see also IRS Tax Reform Tax Tip 2018-69, May 4, 2018, available at, and Notice 2018-71, Q&A 8):

  • The birth and care of a newborn child of the employee;
  • The placement of a child with the employee for adoption or foster care;
  • To care for the employee's spouse, child, or parent who has a serious health condition;
  • The employee's inability to perform the functions of his or her position due to a serious health condition;
  • A qualifying "exigency" arising from the fact that the employee's spouse, child, or parent is on "covered active duty" or "has been notified of an impending call or order to covered active duty" in the armed forces; or
  • For a qualifying employee who is the spouse, child, parent, or next of kin of a covered servicemember, to care for the servicemember.

Although FMLA Section 102(d)(2) allows eligible employees to elect, or employers to require, that they substitute for family and medical leave any accrued vacation, personal, or medical or sick leave, those types of leave do not qualify for the tax credit unless restricted to one or more of the above family and medical leave purposes (Sec. 45S(e)(2)). Any leave paid or required to be paid by a state or local government will also not be taken into account (Sec. 45S(c)(4)).


All general business credits combined, including the family medical leave credit, may not exceed the taxpayer's net income tax over the greater of the tentative minimum tax (which is zero for C corporations after 2017), or 25% of the taxpayer's net regular tax liability that exceeds $25,000 (Sec. 38(c)(1)). However, if the sum of general business credits does exceed these amounts, the excess can be carried back one year and carried forward 20 years (Secs. 39(a)(1)(A) and (B)).

When a general business excess credit is carried back or forward, it is subject to the ordering rules of Sec. 38(d)(1), which provides that the component credits will be used in the order in which they are listed in Sec. 38(b). The family and medical leave credit is listed as Sec. 38(b)(32), the final credit in the list. As a result, business tax advisers also may need to take into consideration clients' other excess unused general business credits, if any.

Employers may claim the credit by filing Form 8994, Employer Credit for Paid Family and Medical Leave (still in development as of this writing), and Form 3800, General Business Credit, with their tax return.


The family and medical leave credit may be immediately beneficial to employers that already provide paid family and medical leave, with minimal additional administrative concerns. For those not currently offering family and medical leave, the requirements and significant costs associated with maintaining benefits and positions for employees out on leave may outweigh any tax benefit offered by the new credit.

Despite that, however, companies without a family and medical leave policy may now want to consider implementing one. Employees not currently covered by the FMLA will appreciate the opportunity to have job-protected leave time that other workers enjoy (see the sidebar, "The Nontax Benefits: 'Satisfaction and Engagement' "). They, along with workers for whom unpaid family and medical leave is already available, will also appreciate receiving at least half their normal salary while they care for a newborn child or take time off from work for other qualifying reasons.

The nontax benefits: ‘Satisfaction and engagement’

By Paul Bonner

In July 2018, the Senate Subcommittee on Social Security, Pensions, and Family Policy held a hearing on the importance to families of paid family leave (statements and video available). Among the witnesses testifying was Carolyn O’Boyle, managing director in the Talent organization for Deloitte Services LP.

In her testimony, O’Boyle described Deloitte’s experience in expanding a prior program to what since 2016 has been up to 16 weeks’ fully paid family leave for eligible employees. While Deloitte’s previous program provided eight weeks’ leave to a primary caregiver of a new child by birth or adoption and three weeks for a nonprimary caregiver, the new program erases the primary and nonprimary distinction and includes caring for spouses and other family members with a serious health condition.

In a follow-up interview with the JofA, O’Boyle further described the program and its impact.

“We’ve seen benefits — certainly, satisfaction and engagement,” she said. “It allows participants to feel more secure in their ability to meet caregiving needs.”

One way the program is comprehensive, O’Boyle said, is that it is gender-neutral with respect to caregiving, which helps alleviate stresses on families as a whole.

“We’re not presuming we understand what role a given individual will play in their family dynamic. And so we put more power back in the hands of that individual,” she said.

In all, more than 5,000 Deloitte professionals have used the program, with less impact on work performance than was originally projected. And resulting employee engagement yields higher performance and productivity, O’Boyle said.

“It comes back to peace of mind, and how we can help our people manage that. And making sure our people know that they have an organization that supports them,” she said.

About the authors

Matthew Geiszler, Ph.D., is an assistant professor of accounting at Ithaca College in Ithaca, N.Y. John McKinley, CPA, CGMA, J.D., LL.M., is professor of the practice, accounting and taxation, at Cornell University in Ithaca, N.Y.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at or 919-402-4434.

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