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Employer credit, family and medical leave unavailable to section 501(c)(3) organizations

Employer credit, family and medical leave

The IRS yesterday released an advance version of Notice 2018-71 as guidance—in a “question and answer” (“Q&A”) format—about the employer credit for paid family and medical leave under section 45S (added to the Code by Pub. L. No. 115-97, enacted December 22, 2017).


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Notice 2018-71 [PDF 115 KB] clarifies—in an example—that the Family and Medical Leave Act (FMLA) credit is unavailable to section 501(c)(3) organizations, but the notice does not address the eligibility of other section 501(c) organizations to claim the credit. 

Read general information about Notice 2018-71 in TaxNewsFlash–Exempt Organizations

Notice 2018-71 and exempt organizations

Although section 45S allows many employers to claim a credit for a percentage of wages paid to employees if qualifying criteria are met, the manner in which the statute defines certain terms precludes section 501(c)(3) organizations from claiming the credit. Specifically, Notice 2018-71 explains that because “wages” (the amount upon which the credit is based) is defined as “all remuneration for employment” under the FUTA employment tax provisions—and because employment by a section 501(c)(3) organization is not “employment” for such purposes—section 501(c)(3) organizations would not have any wages upon which to claim the credit. Notice 2018-71, Q&A 24, Ex. 2. 

KPMG observation

In light of the IRS’s rationale in concluding that section 501(c)(3) organizations are ineligible to claim the credit, it appears that other entities that enjoy a similar FUTA employment tax exception—such as the federal and state governments, political subdivisions, and instrumentalities—would also be ineligible to claim the credit. 

Notice 2018-71 does not address the eligibility of other section 501(c) organizations to claim the credit. Presumably such organizations may claim the credit if amounts they pay to employees constitute wages for FUTA employment tax purposes and all other relevant requirements are met. 

The notice also provides that leave paid by a state or local government or required by a state or local law is not taken into account for purposes of determining the credit. Notice 2018-71, Q&As 9, 21 and 26. 


For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Preston Quesenberry | +1 202 533 3985 | 

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