Federal Employer Tax Incentive Makes Paid Leave Credit Permanent

The federal Employer Credit for Paid Family and Medical Leave under Section 45S is now a permanent part of the tax code. The credit was created to encourage businesses to provide paid family and medical leave benefits to employees who need time away from work for personal or family-related reasons.

Under the credit, eligible employers may receive a tax credit worth between 12.5% and 25% of the wages paid to employees while they are on approved leave. The percentage depends on how much of the employee’s normal wages the employer continues to pay during the leave period. The credit may apply for up to 12 weeks of leave per employee each year.

To qualify, employers must have a written policy explaining the paid leave benefit. The policy must provide at least two weeks of paid leave annually for full-time employees, with part-time employees receiving a proportional amount. Employees must also receive at least 50% of their normal wages while on leave.

The leave must be provided for reasons covered under the Family and Medical Leave Act (FMLA).

Common qualifying reasons include:

The birth or adoption of a child
Caring for a spouse, child or parent with a health condition
The employee’s own health condition
Certain military family leave situations

An important limitation is that the credit only applies to voluntary paid leave offered by the employer. Leave that is already required under state or local law generally does not qualify for the credit. Employers also cannot claim credit for wages funded through state paid leave programs.

For many businesses, especially small and mid-sized employers, the permanent tax credit may help offset part of the cost of offering paid leave benefits. It may also encourage employers to create long-term paid leave policies that support employee retention, recruitment and workplace flexibility.