Federal Tax Incentives:
Paid Family and Medical Leave Credit
Background
The Paid Family and Medical Leave Credit was enacted by the Tax Cuts and Jobs Act (TCJA), P.L. 115‑97, adding § 45S to the Internal Revenue Code. IRC § 45S; Pub. L. No. 115‑97, § 13403.
Most businesses with at least 50 employees and most public‑sector employers are subject to the Family and Medical Leave Act of 1993 (FMLA), P.L. 103‑3, which requires them to provide employees, for specified reasons, up to 12 weeks of job‑protected leave with continuation of group health benefits and reinstatement rights. 29 U.S.C. §§ 2612(a)(1), 2614(a)(1)(A)–(B), (c)(1). The FMLA does not require paid leave. 29 U.S.C. § 2612(c).
Internal Revenue Code § 45S provides a general business credit (under § 38) to eligible employers that provide paid family and medical leave to qualifying employees, equal to a percentage of wages paid during FMLA‑qualified leave (up to 12 weeks per employee per year). I.R.C. §§ 45S(a), (b)(3), (c)(1)(B), 38(b)(5), (b)(18).
The credit applies to wages paid in tax years beginning after Dec. 31, 2017, and has been extended by subsequent legislation; under current law the credit is available for qualified wages paid through Dec. 31, 2025. IRC § 45S(i) (as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Div. EE, § 119); Consolidated Appropriations Act, 2021, Pub. L. No. 116‑260.
The § 45S credit is available to employers subject to Title I of the FMLA and to employers not subject to Title I, provided the employer maintains a compliant written policy (including “non‑interference” protections for any employees not covered by Title I). IRC § 45S(c)(1)–(2); Notice 2018‑71, 2018‑41 I.R.B. 548, Q/A‑3, Q/A‑15.
Calculating the Credit
The § 45S credit equals the applicable percentage of wages paid to qualifying employees while on family and medical leave (up to 12 weeks per employee, per tax year). IRC §§ 45S(a)(1), (b)(3), (e)(1). The leave must be paid at ≥ 50% of the employee’s wages normally paid for services. IRC § 45S(c)(1)(B).
The applicable percentage is 12.5% of such wages, increased by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50%, capped at 25% when leave is paid at 100% of normal wages. IRC § 45S(a)(2).
The credit for any employee may not exceed (normal hourly wage × hours of FMLA leave taken), with a regulatory proration method for non‑hourly employees. IRC § 45S(b)(1)–(2); Notice 2018‑71, Q/A‑32.
Wages Definition and Coordination
“Wages” has the meaning in § 3306(b) (without dollar limits) and cannot include amounts used for any other credit in subpart D (no double counting). IRC § 45S(g)(1)–(2). Employers must reduce wage deductions (and any other wage‑based general business credit) by the amount of the § 45S credit. IRC §§ 280C(a), 38(c). Notice 2018‑71, Q/A‑19 (overtime/discretionary bonuses excluded from “wages normally paid”).
Third‑Party Payers/STD
Wages paid by a third‑party payer (PEO/CPEO/insurer) for services to an eligible employer are considered wages of the eligible employer; § 45S may also apply to amounts paid via employer short‑term disability programs if all § 45S requirements are met. Notice 2018‑71, Q/A‑27, Q/A‑28.
State‑Mandated/Paid Leave
Leave paid by a state or local government, or required by state/local law, is not taken into account in computing the credit or in meeting the minimum paid‑leave requirements. IRC § 45S(c)(4).
Written Policy; Non‑Interference; Minimums
An eligible employer must have a written policy that (IRC § 45S(c)(1)(A)–(B)):
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(1) provides at least two weeks of annual paid family and medical leave to all qualifying employees who are not part‑time (and a pro rata amount to part‑time employees), and
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(2) pays at least 50% of wages normally paid.
For any qualifying employees not covered by Title I of the FMLA (“added employees”), the policy must include non‑interference language (no interference, restraint, denial, discharge, or discrimination for exercising rights or opposing policy violations). IRC § 45S(c)(2)(A); Notice 2018‑71, Q/A‑15–16.
Policy Timing
Generally, leave must be taken after the policy is in place (later of adoption/effective dates); a limited retroactivity rule applied for an employer’s first taxable year beginning after Dec. 31, 2017, if the employer adopted by Dec. 31, 2018 and made retroactive payments. Notice 2018‑71, Q/A‑6.
Part‑time Definition and Methods
A part‑time employee is “customarily employed” under 30 hours/week; reasonable methods may be used to determine customarily‑worked hours (e.g., 29 C.F.R. § 2530.200b‑2). Notice 2018‑71, Q/A‑17.
Uniformity
Rates/periods of paid FMLA need not be uniform, but the minimum paid‑leave requirements must be satisfied for each FMLA purpose for which the credit is claimed. Notice 2018‑71, Q/A‑21–22.
Qualifying Employee; Family and Medical Leave
A qualifying employee is an employee (as in FLSA § 3(e)) who has been employed for one year or more and whose prior‑year compensation does not exceed 60% of the § 414(q)(1)(B)(i) HCE threshold (for 2025, $150,000 × 60% = $90,000). IRC § 45S(d)(1)–(2); IRC § 414(q)(1)(B)(i). Notice 2018‑71, Q/A‑13–14.
“Family and medical leave” has the same meaning as FMLA § 102(a)(1)(A)–(E) and (3) (birth/adoption/foster placement; care for spouse/child/parent with serious health condition; employee’s own serious health condition; qualifying exigency; and military caregiver). IRC § 45S(e)(1); 29 U.S.C. § 2612(a)(1), (3). Paid vacation/personal/sick leave does not qualify unless specifically designated and restricted to FMLA purposes. IRC § 45S(e)(2); Notice 2018‑71, Q/A‑8–9.
IRS Links, Notices, & Filing Requirements
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About Form 8994, Credit for Paid Family and Medical Leave
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Claim the credit on Form 8994, Paid Family and Medical Leave Credit, and include it in Form 3800, General Business Credit; maintain documentation of the written policy, eligibility, wages, and computations.
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Section 45S Employer Credit for Paid Family and Medical Leave FAQs