Paid Family Leave Credit
Employers that pay employees during family or medical leave can claim a federal credit of 12.5% to 25% of the wages paid during that leave. The 2025 law made the credit permanent. For an employer that pays full wages during leave, the government covers a quarter of the cost, up to 12 weeks per employee per year.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Employers that already pay, or plan to pay, wages during family or medical leave
- Businesses with a written leave policy, or willing to adopt one
- Employers with staff earning moderate wages, since higher earners do not qualify
- Texas employers, where no state paid-leave program covers the cost
Who it's not for
- Employers that only offer unpaid leave
- Employers whose leave pay is only general paid time off, vacation, or sick days
- Businesses unwilling to put a qualifying written policy in place
How it works
The credit applies to wages paid to qualifying employees on family and medical leave for the reasons the Family and Medical Leave Act recognizes: the birth or adoption of a child, caring for a spouse, child, or parent with a serious health condition, the employee's own serious health condition, and certain military family needs. Vacation, personal days, and ordinary sick leave do not count.
The rate starts at 12.5% when leave pay is 50% of normal wages. It rises 0.25 percentage point for each point above 50%, up to 25% when leave is paid at 100% of normal wages. Up to 12 weeks of leave per employee per year can be counted.
The employer needs a written policy giving at least two weeks of paid family and medical leave a year to full-time qualifying employees, prorated for part-time staff, at no less than 50% of normal wages. A qualifying employee must meet a service requirement and have prior-year compensation under a limit tied to the highly compensated employee threshold, which is indexed for inflation each year.
Leave paid for or required by state or local law is subject to special rules. Texas has no state paid-leave mandate, which keeps the calculation simpler for Texas employers.
The wage deduction is reduced by the amount of the credit, so the benefit is the credit minus the tax value of the lost deduction. The credit is claimed on Form 8994 as part of the general business credit.
Illustrative example
Illustrative: an employee earning $1,500 a week takes 8 weeks of qualifying leave. Compare full pay with 75% pay.
- At 100% pay: wages during leave = $1,500 x 8 = $12,000
- Credit at 25%: $12,000 x 25% = $3,000
- At 75% pay: weekly leave pay = $1,500 x 75% = $1,125; wages = $1,125 x 8 = $9,000
- Rate at 75%: 12.5% + (25 points x 0.25) = 12.5% + 6.25% = 18.75%
- Credit at 18.75%: $9,000 x 18.75% = $1,687.50
- Wage deduction is reduced by the credit in each case: $3,000 or $1,687.50
In this illustration, paying full wages during leave earns a $3,000 credit, a quarter of the $12,000 paid.
The rules
| Rule | Citation |
|---|---|
| A credit of 12.5% to 25% of wages paid during family and medical leave, up to 12 weeks per employee per year; made permanent by the 2025 law. | IRC §45S |
| The employer must have a written policy with at least two weeks of paid leave at no less than 50% of normal wages. | IRC §45S(c) |
| The deduction for wages is reduced by the amount of the credit. | IRC §280C(a) |
| The credit is part of the general business credit. | IRC §38 |
Watch-outs
- The policy must be in writing and in place for the leave you claim. A policy adopted after the leave may not count for that period.
- Employees above the compensation limit do not qualify. Screen each employee every year.
- General PTO that employees can use for any reason does not qualify. Leave must be specifically designated as family and medical leave.
- Keep records of the leave reason, dates, and pay rate for each employee claimed.
What we do
We review your leave policy against the requirements, identify which employees qualify, and compute the credit and the wage-deduction reduction. We prepare Form 8994 and keep the employee-level schedule that supports the claim.
Questions
Does the employee have to be eligible under the FMLA?
No. The credit uses FMLA reasons for leave, but it is available to employers not covered by the FMLA, as long as the policy and employee tests are met.
Can we pay less than full wages and still get the credit?
Yes, as long as leave pay is at least 50% of normal wages. The credit rate is lower at lower pay levels.
Is there a limit per employee?
Up to 12 weeks of leave per employee per year can be taken into account.