Employer Credit for Paid Family and Medical Leave (Section 45S)
Internal Revenue Service
12.5%–25% of leave wages
Credit for paying employees during FMLA leave
A federal income tax credit for employers who voluntarily provide paid family and medical leave to qualifying employees. The credit equals 12.5%–25% of wages paid during leave — 12.5% if employees receive 50% of their normal wages during leave, scaling up to 25% if leave pay is 100% of normal wages. The employee must be a qualifying employee (earned ≤$96,000 in the preceding year, adjusted for inflation). The employer's paid leave policy must be in a written plan and guarantee at least 2 weeks of leave at ≥50% pay. The credit was made permanent by the OBBBA (One Big Beautiful Bill Act, July 2025) — previously subject to annual congressional reauthorization.
- Funding type
- Tax Credit
- Level
- Federal
- Amount
- 12.5% of wages paid during qualifying family/medical leave (base rate, when employee receives 50% of normal wages during leave). Scales up by 0.25% for each additional percentage point of normal wages paid, reaching 25% at 100% normal wage replacement during leave. Minimum leave: 2 weeks/year per employee. Applies only to employees with prior-year compensation ≤$96,000 (inflation-adjusted; 2024 threshold approximately $96,000).
- Realistic amount
- A 50-person company granting 6 weeks of full-pay family leave to an average of 5 employees/year at an average wage of $6…
- Deadline
- Ongoing — claimed annually on federal income tax return (Form 8994). Made permanent by OBBBA (July 4, 2025). Previously required annual congressional extension.
- Status
- active
- States
- Nationwide
- Payment model
- tax offset
Who qualifies
- Eligible employers: any employer (C-corp, S-corp, partnership, sole proprietor) that has a written paid family and medical leave policy meeting IRS requirements
- Written policy must: (1) provide at least 2 weeks of paid family/medical leave per year to full-time qualifying employees (prorated for part-time), (2) pay at least 50% of the employee's normal wages during leave, (3) not be a state or local government mandate that's substituting for voluntary employer action
- Qualifying employees: any employee who has been employed by the employer for at least 1 year AND whose prior-year compensation did not exceed $96,000 (inflation-adjusted — verify current threshold for applicable year)
- Leave must be for FMLA-qualifying reasons: birth or adoption of a child, care for a family member with serious health condition, employee's own serious health condition, qualifying military exigency, or care for a covered servicemember
- If the employer is in a state with mandatory paid leave laws (CA, NY, NJ, WA, CO, CT, OR, etc.), only leave above the state mandate qualifies for the credit — the mandatory minimum does not generate a federal credit
- Employer cannot claim the credit if it discriminates in favor of highly compensated employees in providing leave
What it covers
Eligible expenses
- Wages paid to qualifying employees during FMLA-qualifying family or medical leave
- Wages for parental leave (birth, adoption, foster placement)
- Wages for leave to care for a seriously ill family member
- Wages for leave for the employee's own serious health condition
- Wages for military family leave (qualifying exigency or care for injured servicemember)
- Prorated wages for part-time employees qualifying for reduced leave entitlement
Ineligible expenses
- Wages for vacation leave, personal leave, or sick leave not meeting FMLA-qualifying reasons
- Wages paid as state-mandated paid leave (only employer-paid leave above the state mandate qualifies)
- Wages for employees employed less than 1 year
- Wages for employees whose prior-year compensation exceeds the inflation-adjusted threshold (~$96,000)
- Supplemental unemployment benefits or short-term disability payments from third-party insurance (must be employer-direct wages)
How to apply
-
1
Draft or update written paid leave policy
Create a written paid family/medical leave policy meeting IRS requirements: minimum 2 weeks/year for full-time employees (prorated for part-time), at least 50% wage replacement, covering all qualifying employees. Have HR and legal review to confirm FMLA qualifying reasons are covered and state-law interaction is addressed.
~6 hrs
-
2
Identify qualifying employees for the credit
For each employee who took family/medical leave during the year: (1) confirm employed for at least 1 year, (2) check prior-year W-2 compensation against the inflation-adjusted threshold (~$96,000). Employees above the threshold do not generate credit even if their leave qualifies under FMLA.
~3 hrs
-
3
Calculate wages paid during qualifying leave
For each qualifying employee on leave: total wages paid during the family/medical leave period. Determine the replacement rate (wages paid ÷ normal wages). Apply the credit rate formula: 12.5% + [0.25% × (replacement rate - 50%)] for each additional 1% above 50%. At 100% replacement, credit rate = 25%.
~3 hrs
-
4
File Form 8994 and coordinate with Form 3800
Complete IRS Form 8994 (Employer Credit for Paid Family and Medical Leave). The credit flows through Form 3800 (General Business Credit) to your federal income tax return. Pass-through entities pass the credit to owners via Schedule K-1.
~3 hrs
The OBBBA made §45S permanent — you can now build it into your HR policy permanently rather than hoping Congress extends it each year. Design your written policy now; the credit starts the first year you have qualifying leave taken.
Deadline & timing
§45S was enacted in the TCJA (2017) as a 2-year pilot. Congress extended it annually through 2025 on a year-by-year basis, creating uncertainty for HR policy planning. The OBBBA (One Big Beautiful Bill Act, signed July 4, 2025) made §45S permanent law — removing the annual reauthorization uncertainty. Employers can now design paid leave policies with confidence that the credit will remain available.
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Last reviewed 2026. GrantCompass is an independent funding-discovery tool and is not affiliated with any government agency. Always confirm details on the official program page.