3512 / What is the tax credit for employers that provides paid family and medical leave to employees?
The 2017 Tax Act created a new temporary tax credit for employers that provide paid family and medical leave to employees.1 The 2025 OBBBA made the credit permanent and expanded its scope.
The credit is an amount equal to 12.5 percent of the wages that are paid to qualifying employees during a period where the employee was on family and medical leave if the employee is paid 50 percent of the normal wages that he or she would receive from the employer. The credit increases by 0.25 percentage points (but can never exceed 25 percent) for each percentage point by which the rate of payment exceeds 50 percent of wages. The OBBBA allows the employer to calculate the credit based on the wages paid to the employee on leave or on premiums paid for family and medical leave insurance policies. The employer must choose one or the other, so may not “double dip”.
For purposes of the 50 percent of wages requirement, overtime and discretionary bonuses are excluded from the wages that are normally paid. Wages paid by a third-party payor, such as an insurance company or professional employer organization, are taken into account if based on services provided by the employee to the eligible employer. Similarly, amounts paid under the employer’s short-term disability program are taken into account. The rate of pay does not have to be uniform.
Example: The employer provides six weeks paid leave for a qualifying employee for the birth or adoption of a child, at a rate of 100 percent of wages. The same employer provides two weeks of annual leave paid at a rate of 75 percent of wages for all other FMLA purposes. The policy satisfies the paid leave requirements. Note that the rate of pay cannot vary based on the employee’s classification (i.e., the employee cannot be paid leave offered only to employees not covered by a collective bargaining agreement).2
Only 12 weeks of family and medical leave can be taken into account for any one employee. Further, all part-time employees must be allowed a pro-rated amount of paid family and medical leave.3 Any leave paid for by the state or local government is not taken into account.4
In order to qualify, employers must have a written policy in place to allow all qualifying full-time employees no less than two weeks of paid family and medical leave each year. The written policy may be set forth in a single document, or in multiple documents that cover different classes of employee or different types of leave. The policy must be in place before the leave for which the employer claims the credit is taken, except as otherwise provided in a transition rule. A policy is considered to be “in place” at the later of its adoption date or effective date. Under the transition rule, the policy was considered “in place” as of its effective date, rather than a later adoption date, for the first tax year beginning after December 31, 2017 if the policy (a) was adopted before December 31, 2018 and (b) the employer complied with the terms of the policy for the entire retroactive period.5
The employer need not be subject to title 1 of the Family and Medical Leave Act of 1993 (FMLA) to be a qualifying employer. However, employers who employ at least one employee who is not subject to title 1 of the FMLA must include and comply with “noninterference” language in the required written policy. This language must generally state that the employer will not attempt to interfere with the employee’s exercise of his or her rights under the written policy, and will not discharge or discriminate against an employee who opposes any practice prohibited by the written policy.6
“Qualifying employees” are those who have been employed by the employer (1) six months or more, (2) who customarily work at least 20 hours per week and (3) who had compensation that did not exceed 60 percent of the compensation threshold for highly compensated employees7 in the previous year.8 Prior to 2026, the threshold for determining eligibility was at least one year of employment. Shortening the employee qualification period is optional for employers.
The employer can use any reasonable method to determine how long the employee has been employed. Note that the 2025 OBBBA introduced the 20-hour threshold. The requirement that an employee work at least 1,250 hours to be an FMLA-eligible employee under pre-existing federal law does not apply to the Section 45S credit.
If the employee is otherwise a qualifying employee, the employer’s written policy cannot exclude any class of employees (although the amount of paid leave provided may be pro-rated for part-time employees who customarily work fewer than 30 hours per week). For part-time employees, the paid leave ratio must be at least equal to the ratio of the expected weekly hours worked by a qualifying employee who is a part-time employee to the expected weekly hours worked by an equivalent qualifying employee who is not a part-time employee.9
Planning Point: The employee must be a qualifying employee at the date the paid leave is taken for the credit to apply.
“Family and medical leave” means leave as defined under Section 102(a)(1)(a)-(e) or Section 102(a)(3) of the FMLA. It includes leave taken as a result of: (1) the birth of a child, (2) adoption or fostering of a child, (3) the need 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 his or her job, (5) issues arising due to the employee’s spouse, child or parent being on covered active duty (or being notified of an impending order to covered duty), or (6) the need to care for a service member who is the employee’s spouse, child, parent or next of kin. Paid leave that is vacation leave, personal leave or other medical or sick leave does not qualify for the Section 45S tax credit.10
The employer’s policy must strictly apply to only leave that qualifies as an FMLA purpose—meaning that the employer cannot give the employee a choice between an FMLA purpose and vacation leave, for example. This is the case even if the employee actually does use the leave for a qualifying purpose. The IRS has carved out an exception for situations where the employer provides leave to care for a group of individuals, and one or more of those individuals is not a qualified individual for FMLA purposes. In this case, the policy will continue to qualify, except that if an employee takes the leave to care for a non-qualified individual, the employer will not be entitled to the credit with respect to that employee.11
This credit is only available for tax years beginning after December 31, 2017 and before December 31, 2025 (as extended), and is a part of the general business tax credit.12 The credit is allowed against the alternative minimum tax (AMT).
1. IRC § 45S (added by the Tax Cuts and Jobs Act).
2. Notice 2018-71.
3. IRC § 45S(c)(1).
4. IRC § 45S(c)(4).
5. Notice 2018-71.
6. Notice 2018-71.
7. Under IRC § 414(g)(1)(B).
8. IRC § 45S(d).
9. Notice 2018-71.
10. IRC § 45S(e).
11. Notice 2018-71.
12. IRC § 45S(a)(1).