Employer Credit for Paid Family and Medical Leave

The Employer Credit for Paid Family and Medical Leave is a general business tax credit for certain employers who provide paid leave to their employees. Established under Section 45S of the Internal Revenue Code, the credit is available for tax years through 2025 and directly offsets an employer’s tax liability. This incentive allows employers to claim a percentage of the wages paid to employees while they are on qualified family or medical leave. As part of the general business credit, it is non-refundable but may have carryback and carryforward provisions if it exceeds the current year’s tax liability.

Employer Eligibility Requirements

To qualify for the credit, a business must have a formal written policy. This can be a distinct document or a section within an employee handbook. The policy must be in place before any employee takes the leave for which the credit is claimed.

The policy must provide at least two weeks of annual paid family and medical leave for all qualifying full-time employees. For part-time employees, the policy must offer a commensurate amount of leave on a pro-rated basis.

The written policy must state that leave is paid at a rate of at least 50% of the employee’s normal wages. An employer can choose to pay more than 50%, which can increase the value of the tax credit.

The policy must contain nondiscrimination language to ensure the leave is not disproportionately offered to highly compensated employees, owners, or executives. The policy must also include non-interference language, specifying that the employer will not inhibit an employee’s attempt to use the benefits.

Qualifying Employee Leave

For an employee’s leave to be eligible for the credit, they must have been employed by the company for one year or more. Additionally, the employee’s compensation in the preceding year cannot have exceeded a specific threshold. To claim the credit for the 2025 tax year, for example, the employee’s 2024 compensation cannot have exceeded $96,000.

The reasons for taking the leave mirror the qualifications under the Family and Medical Leave Act (FMLA). Qualifying reasons include:

• The birth and care of a newborn child.
• The placement of a child for adoption or foster care.
• Caring for an immediate family member (spouse, child, or parent) with a serious health condition.
• The employee’s own serious health condition.

Any paid leave mandated by state or local law is not eligible for this federal tax credit. If an employer operates in a jurisdiction with a mandatory paid leave program, only benefits provided above and beyond those requirements can be considered for the credit.

Calculating and Claiming the Credit

The credit is calculated on a sliding scale based on the wage replacement rate. The credit starts at 12.5% of the wages paid if the employer pays 50% of the employee’s normal wages.

For every percentage point that the payment rate exceeds 50%, the tax credit percentage increases by 0.25 percentage points. For instance, if an employer pays 70% of normal wages, the rate exceeds the 50% floor by 20 points, resulting in a 5% increase to the credit rate (20 x 0.25%). This makes the total credit 17.5% of the wages paid. The credit is capped at a maximum of 25%, which is reached when an employer pays 100% of an employee’s normal wages.

Consider an employee who earns $1,000 per week, and the employer’s policy provides leave paid at 75% of normal wages ($750). Since the payment rate exceeds 50% by 25 percentage points, the credit rate is 18.75% (12.5% + (25 x 0.25%)). For each week of leave, the employer could claim a credit of $140.63 ($750 x 18.75%). The total amount of leave that can be used for the credit is limited to 12 weeks per employee per tax year.

Employers use IRS Form 8994, Employer Credit for Paid Family and Medical Leave, to calculate the credit amount. This form guides the business through the steps of inputting qualifying paid leave wages and determining the applicable credit percentage.

After calculating the credit on Form 8994, the final amount is reported on Form 3800, General Business Credit, which is filed with the business’s annual income tax return. An employer claiming this credit must reduce their deduction for employee compensation by the amount of the credit claimed.