What Is the FMLA Credit for Employers?

The Employer Credit for Paid Family and Medical Leave is a tax incentive for businesses that provide paid time off for specific family and health-related reasons. Established by the Tax Cuts and Jobs Act of 2017, the credit encourages employers to offer wage replacement during qualifying leave. This general business credit directly reduces an employer’s tax liability. The credit is available for wages paid in tax years through 2025.

Eligibility Requirements for the Credit

To qualify for the credit, an employer must first establish a formal written policy. This policy cannot be an informal arrangement; it must be a documented plan available to employees. The policy must offer at least two weeks of annual paid family and medical leave to all qualifying full-time employees. For part-time employees, the two-week minimum is prorated based on their work schedule.

The written policy must stipulate that the leave is paid at a rate of at least 50% of the employee’s normal wages. A policy offering less than this 50% threshold will not make the employer eligible for the credit. The policy must also contain specific language ensuring non-interference with an employee’s right to take the leave, particularly for any employees not otherwise covered by the federal Family and Medical Leave Act (FMLA).

The credit is only available for leave provided to “qualifying employees.” A qualifying employee is someone who has been employed by the business for one year or more. For the 2025 tax year, the employee’s 2024 compensation could not have exceeded $93,000. Any paid leave that is mandated or paid for by a state or local government program is not eligible for this federal tax credit.

The reasons for the leave must align with the purposes outlined in the FMLA. These 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.
• An employee’s own serious health condition that makes them unable to perform their job.

Calculating the Credit Amount

The credit amount is a percentage of the wages paid to a qualifying employee while they are on family and medical leave. The starting point for the credit is a rate of 12.5%, which applies if the employer’s policy pays 50% of the employee’s normal wages during the leave period. For each percentage point that the employer’s payment rate exceeds 50%, the credit rate increases by 0.25 percentage points.

The credit percentage is capped at a maximum of 25%. This maximum rate is achieved when an employer pays an employee 100% of their normal wages while on qualifying leave. For example, if an employer pays 70% of an employee’s wages, the credit rate would be 17.5%. This is calculated as the 12.5% base plus an additional 5% (20 percentage points above the 50% floor, multiplied by 0.25%).

For any single employee, the credit can only be applied to a maximum of 12 weeks of leave per taxable year. To illustrate the calculation, consider an employee who normally earns $1,000 per week. If the employer pays them $800 (80%) per week for qualifying leave, the credit rate is 20%. The credit for that week of leave would be $160 ($800 in paid wages multiplied by the 20% credit rate).

How to Claim the Credit

An employer claims the credit on their federal tax return using IRS Form 8994, Credit for Paid Family and Medical Leave. This form is used to aggregate the credit amounts for each qualifying employee and compute the total credit for the tax year. The total credit amount from Form 8994 is then reported on Form 3800, General Business Credit.

Form 3800 is a summary form used by businesses to claim various business-related tax credits, and it is filed along with the business’s main annual income tax return. The specific return depends on the business structure; for example, a corporation would file it with Form 1120, while a partnership would include it with Form 1065. An employer must reduce its deduction for employee wages by the amount of the credit claimed, preventing a double tax benefit.