Information For...

For you and your family
Standard mileage and other information

Forms and Instructions

Individual Tax Return
Instructions for Form 1040
Request for Taxpayer Identification Number (TIN) and Certification
Request for Transcript of Tax Return

 

Employee's Withholding Allowance Certificate
Employer's Quarterly Federal Tax Return
Employers engaged in a trade or business who pay compensation
Installment Agreement Request

Popular For Tax Pros

Amend/Fix Return
Apply for Power of Attorney
Apply for an ITIN
Rules Governing Practice before IRS

Section 45S Employer Credit for Paid Family and Medical Leave FAQs

Internal Revenue Code Section 45S provides a tax credit for employers who provide paid family and medical leave to their employees. Eligible employers may claim the credit, which is equal to a percentage of wages they pay to qualifying employees while they’re on family and medical leave. The credit generally is effective for wages paid in taxable years of the employer beginning after December 31, 2017, and it isn’t available for wages paid in taxable years of the employer beginning after December 31, 2019. For more information, see Notice 2018-71.

Q: What is the employer credit for paid family and medical leave?

A: This is a general business credit employers may claim, based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions.

Q: Who may claim the employer credit for paid family and medical leave?

A: Employers must have a written policy in place that meets certain requirements, including providing:

  1. At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part time), and
  2. The paid leave is not less than 50 percent of the wages normally paid to the employee.

Q: Who is a qualifying employee?

A: A qualifying employee is any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain amount. For an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017.

Q: What is “family and medical leave” for purposes of the paid family and medical leave credit?

A: This is leave for one or more of the following reasons:

  1. Birth of an employee’s child and to care for the child.
  2. Placement of a child with the employee for adoption or foster care.
  3. To care for the employee’s spouse, child, or parent who has a serious health condition.
  4. A serious health condition that makes the employee unable to perform the functions of his or her position.
  5. Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
  6. To care for a service member who is the employee’s spouse, child, parent, or next of kin.

If an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above), that paid leave is not considered family and medical leave.  In addition, any leave paid by a State or local government or required by State or local law will not be taken into account in determining the amount of employer-provided paid family and medical leave.

Q: How is the paid family and medical leave credit calculated?

A: The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.  The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.  In certain cases, an additional limit may apply.

Q: How does the credit impact an employer’s deduction for the wages paid to an employee while on family and medical leave or claim for any other general business credits?

A: An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit.  Also, any wages taken into account in determining any other general business credit may not be used in determining this credit.

Q: What is the effective date of the paid family and medical leave credit?

A: The credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017, and it is not available for wages paid in taxable years beginning after December 31, 2019.

Q:  What’s the general rule for when an employer’s written policy must be in place?

A:  Except for the first taxable year of an employer beginning after December 31, 2017, * an employer can claim the credit only for leave taken after the written leave policy is in place. The written policy is in place on the later of the policy’s adoption date or the policy’s effective date.

Example 

Facts:  Employer adopts a written policy that satisfies all requirements of Section 45S on June 15, 2019, with an effective date of July 1, 2019.

Conclusion:  Assuming the employer met all other requirements for the credit, the employer may claim the credit for family and medical leave paid per that policy to qualifying employees for leave taken on or after July 1, 2019.

* A transition rule in Q&A 6 of Notice 2018-71 applies for the first taxable year of an employer beginning after December 31, 2017.

Q:  For the first taxable year of an employer beginning after December 31, 2017, what’s the transition rule for when the employer’s written policy must be in place?

A:  For an employer’s first taxable year beginning after December 31, 2017, a written leave policy (whether new or amended) will be in place as of the effective date of the policy or amendment, rather than a later adoption date, if the employer:

  • Adopted the policy or amendment on or before December 31, 2018, and
  • Brings its leave practices into compliance with the terms of the retroactive policy or amendment for the entire period it covers, including making any retroactive leave payments no later than the last day of the taxable year.

Example 1

Facts:  Employer’s taxable year is the calendar year. Employee takes two weeks of unpaid family and medical leave beginning January 15, 2018. Employer adopts a written policy that satisfies the law’s requirements on October 1, 2018 and chooses to make the policy effective retroactive to January 1, 2018. At the time the employer adopts the policy, the employer pays the employee at the payment rate in in the policy for the two weeks of unpaid leave taken in January 2018.

Conclusion:  Assuming the employer met all other requirements for the credit, the employer may claim the credit for the family and medical leave paid to the employee for the leave taken in January 2018.

Example 2

Facts:  Employer’s taxable year is the calendar year. Employer amends its Family and Medical Leave Act (FMLA) policy in writing on April 15, 2018, effective for leave employees took on or after that date, to allow four weeks of paid FMLA leave. . Employer’s FMLA policy doesn’t allow leave for qualifying employees not covered by Title I of the FMLA or include “non-interference” language. Employee is a qualifying employee not covered by Title I of the FMLA who takes three weeks of unpaid family and medical leave beginning June 18, 2018. On October 1, 2018, the employer amends its written policy to include “non-interference” language and paid leave effective April 15, 2018, for qualifying employees not covered by Title I of the FMLA. On October 15, 2018, the employer pays the employee for the three weeks of family and medical leave the employee took beginning June 18, 2018.

Conclusion:  Assuming all other requirements for the credit are met, the employer may claim the credit for the family and medical leave paid to the employee for leave taken beginning in June 2018.  

Q.   What must an employer’s written leave policy include?

A.  In their written policy, an eligible employer must allow at least two weeks of paid family and medical leave (prorated for part-time employees) for all qualifying employees at a rate of at least 50 percent of the wages normally paid to them. And  for any qualifying employees not covered by Title I of the FMLA, the employer needs to make sure the employer will not interfere with, restrain, or deny any right under the policy. They also need to make sure they will not discharge or discriminate against any individual for opposing any practice prohibited by the policy. Q&A 3 of Notice 2018-71 has sample language to satisfy this “noninterference” requirement.

Employers must make the leave available to all qualifying employees, which means all employees who’ve been employed for at least one year and had compensation from the employer for the preceding year that didn’t exceed a certain dollar amount. (For 2017 or 2018, this amount is $72,000.)  The law allows an employer to prorate the two-week leave period for part-time employees (those customarily employed for fewer than 30 hours per week).   

Q.   Is an employer not subject to the FMLA eligible to claim the credit?

A.   Yes, if the employer’s policy meets the requirements described in the previous question.  

Q:  Under what circumstances does Section 45S consider paid leave to be family and medical leave?

A:  Other than the narrow exception described in Q&A 10 of Notice 2018-71, paid leave made available to an employee is considered family and medical leave only if it’s:

  • Specifically designated for one or more FMLA purposes and not used for any other reason, and
  • Not paid by a state or local government or required by state or local law.

Example 1

Facts:  Employer’s written policy includes six weeks of annual paid leave for the birth of an employee’s child and to care for that child (an FMLA purpose). An employee may not use the leave for any other reason. The state or local government doesn’t pay for leave, nor does state or local law require it.

Conclusion:  Employer’s policy includes six weeks of family and medical leave under Section 45S.

Example 2

Facts:  Employer’s written policy includes three weeks of annual paid leave specifically designated for any FMLA purpose and an employee may not use it for any other reason. The state or local government doesn’t pay for leave, nor does state or local law require it.

Conclusion:  Employer’s policy includes three weeks of family and medical leave under Section 45S.

Example 3

Facts:  Employer’s written policy includes three weeks of annual paid leave for: FMLA purposes, minor illness, vacation and specified personal reasons.  The state or local government doesn’t pay for leave, nor does state or local law require it.

Conclusion:  Employer’s policy doesn’t include family and medical leave under Section 45S because the leave isn’t specifically designated for one or more FMLA purposes and can be used for reasons other than FMLA purposes. This is true even if an employee uses the leave for an FMLA purpose.

Q:  What’s the consequence if an employer’s written policy allows paid leave that otherwise would be specifically designated for an FMLA purpose, such as  care for a spouse, child or parent who has a serious medical condition, except for the fact that the leave is available to care for other individuals not specified in the FMLA , such as a grandchild or grandparent who has a serious medical condition?  

A:  In this limited circumstance, the fact that leave could also be used to care for other individuals for whom care under the FMLA purpose isn’t required doesn’t prevent the leave from being considered specifically designated for an FMLA purpose. But, the employer may not claim the credit for any leave taken to care for an individual other than a qualifying employee’s spouse, parent or child.

Example

Facts:  Employer’s written policy allows four weeks of annual paid leave to care for family members with a serious health condition. The policy’s definition of “family members” includes individuals specified in the FMLA (spouse, children and parents) and grandparents, grandchildren and domestic partners too. Employee uses one week of annual paid leave to care for her grandmother and later uses one week of annual paid leave to care for her son.

Conclusion:  Employer’s policy allows paid leave specifically designated for an FMLA purpose. The paid leave taken by the employee to care for her grandmother isn’t family and medical leave under Section 45S, and the employer may not claim the credit for this leave. The paid leave taken by the employee to care for her son is family and medical leave under Section 45S for which the employer may claim the credit, assuming they meet all other requirements for the credit.

Q:  Can paid leave allowed under an employer’s short-term disability program be characterized as family and medical leave?

A:  Yes. Paid leave allowed under an employer’s short-term disability program, whether self-insured by an employer or through a short-term disability insurance policy, may be characterized as family and medical leave if it meets the requirements under the law.

Q:  How does an employer figure whether an employee has been employed for one year or more?

A:  Until further guidance is issued, an employer may use any reasonable method to figure whether an employee has been employed for one year or more. Treating employees as employed for one year or more if they’ve been employed for twelve months, per the FMLA regulations, is an example of a reasonable method.  But, requiring twelve consecutive months of work to be a qualifying employee isn’t a reasonable method for deciding whether an employee has been employed for one year.

Q:  In figuring the rate of payment under the employer’s written policy, is leave paid by a state or local government or required by state or local law considered?

A:  No. Leave paid by a state or local government or required by state or local law isn’t considered in figuring whether an employer’s written policy includes a rate of payment of at least 50 percent of the wages normally paid to an employee for services done for the employer. To be eligible to claim the credit, an employer must independently satisfy the minimum paid leave requirements, including a rate of payment of at least 50 percent of wages normally paid to an employee for services done for the employer.

Example 1

Facts: Under state law, an employee on family and medical leave is eligible to receive six weeks of benefits paid by a state insurance fund at a rate of 50 percent of the employee’s normal wages. Additionally, the employer’s written policy concurrently allows six weeks of annual paid family and medical leave at a rate of payment of 30 percent of the employee’s normal wages for services done for the employer. So, in the aggregate, a qualifying employee can receive six weeks of annual paid family and medical leave at a rate of payment of 80 percent of the employee’s normal wages.

Conclusion:  Employer’s policy doesn’t independently satisfy the requirement to provide a rate of payment of at least 50 percent of wages normally paid to an employee.

Example 2

Facts:  Same facts as Example 1, except that the employer’s written policy allows for each qualifying employee six weeks of annual paid family and medical leave at a rate of payment of 50 percent of the employee’s normal wages that runs concurrently with the State leave. So, in the aggregate, a qualifying employee can receive six weeks of annual paid family and medical leave at a rate of payment of 100 percent of the employee’s normal wages.

Conclusion:  Employer’s policy independently satisfies the requirement to provide for a rate of payment of at least 50 percent of wages normally paid to an employee. Only wages paid under employer’s written policy (50 percent of wages normally paid to an employee) may be used in calculating the credit. Wages paid under state law aren’t used in calculating the credit.

Example 3

Facts:  Under state law, employers need to allow employees six weeks of family and medical leave, and the state law permits this leave to be either paid or unpaid. Employer’s written policy allows each qualifying employee six weeks of annual paid family and medical leave at a rate of payment of 50 percent of wages normally paid to the employee.

Conclusion:  Employer’s policy independently satisfies the requirement to provide a rate of payment of at least 50 percent of wages normally paid to an employee.

Q: Are employers aggregated for purposes of calculating the credit?

A:  No. Except as noted below, employers aren’t aggregated for any purpose , including calculating the credit as in Section D of Notice 2018-71. All persons treated as a single employer under the law are treated as a single taxpayer. Per this aggregation rule, employers are aggregated for purposes of Section 45S(h)(1), which states that a taxpayer may elect to have Section 45S not apply for any taxable year. This is the only purpose for which employers are aggregated.

Q:  Does each member of a controlled group of corporations and each member of a group of businesses under common control generally make a separate election to claim or not to claim the credit?

A:  Yes. Each member of a controlled group of corporations and each member of a group of businesses under common control generally makes a separate election to claim or not to claim the credit. But, for a consolidated group, the agent of the group makes the election. They make an election for the taxable year in which the credit is available by claiming or not claiming the credit on either an original return or an amended return filed for that taxable year.


Disclaimer

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.