Is There a Tax Credit for Paid Family Leave?

Yes. The federal employer credit for paid family and medical leave (Section 45S) is now permanent. The One, Big, Beautiful Bill Act, which the IRS calls the Working Families Tax Cuts, removed its end date and expanded it starting with tax years that begin after December 31, 2025.

12.5%The credit runs from 12.5% to 25% of the wages paid to qualifying employees while they are on leave, depending on how much of their normal pay the leave replaces.
25%The credit runs from 12.5% to 25% of the wages paid to qualifying employees while they are on leave, depending on how much of their normal pay the leave replaces.
50%Your written policy has to pay at least 50% of normal wages.
60%Their pay in the prior year must have been no more than 60% of the IRS highly compensated employee threshold for that year (figured on an annualized basis, prorated for part-time employees).

Yes. Employers that give workers paid family and medical leave can claim a federal general business tax credit under Section 45S of the tax code. The credit was set to end after 2025, but the One, Big, Beautiful Bill Act (Public Law 119-21, signed July 4, 2025), which the IRS now calls the Working Families Tax Cuts, made it permanent. The credit runs from 12.5% to 25% of the wages paid to qualifying employees while they are on leave, depending on how much of their normal pay the leave replaces. Your written policy has to pay at least 50% of normal wages. Starting with tax years that begin after December 31, 2025, employers can also choose to base the credit on premiums paid for a paid family and medical leave insurance policy.

Last checked: November 8, 2026. This page explains the rules only. It is general information, not legal, tax, or financial advice.

The short version

The credit is permanent. Congress removed the old end date for tax years beginning after December 31, 2025.
You need a written policy that gives full-time qualifying employees at least 2 weeks of paid family and medical leave a year (prorated for part-time staff) and pays at least half of their normal wages.
The credit covers up to 12 weeks of leave per employee per year.
Starting in 2026, you can choose to figure the credit on wages paid during leave or on premiums for a paid leave insurance policy.
Regular vacation, personal, or sick leave doesn't count. Leave paid by a state program, or required by state or local law, now counts toward meeting the policy rules but doesn't count toward the credit amount.
You claim it on IRS Form 8994, and it becomes part of your general business credit. You must reduce your wage (or premium) deduction by the amount of the credit.

Who qualifies

Employers of any size that have a qualifying written paid family and medical leave policy in place before the leave is taken.
The policy must include "non-interference" protections for employees who aren't covered by the federal Family and Medical Leave Act.
Qualifying employees must have worked for you at least 1 year, or at least 6 months if you choose that option.
They must customarily work at least 20 hours a week.
Their pay in the prior year must have been no more than 60% of the IRS highly compensated employee threshold for that year (figured on an annualized basis, prorated for part-time employees).
The leave must be for a family and medical leave reason: 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, certain military family needs, or caring for a family member who is a service member.

How the credit is figured

The base credit is 12.5% of the wages paid during leave when the policy pays exactly half of normal wages. The percentage rises as the pay rate goes up, reaching 25% when leave is paid at full wages. Wages counted can't be more than the employee's normal hourly rate times the hours of leave taken.

Under the new premium method, the same percentage applies to premiums you pay or incur during the year for a paid family and medical leave insurance policy, whether or not anyone actually took leave. Only the part of the premium that funds leave that would qualify under the wage method counts. IRS Notice 2026-28 explains how to split premiums and how to choose between the two methods, and Treasury says proposed regulations are coming.

How to get it

How to get started

Write or update your paid leave policy so it meets the Section 45S rules: at least 2 weeks a year for full-time qualifying employees, at least 50% of normal wages, and non-interference language.
Make sure the policy is in place before employees take the leave you want to count.
Decide which employees qualify, including whether to use the 6-month service option.
Choose the wage method or, if you buy paid leave insurance, the premium method.
Keep records of leave taken, wages paid, and premiums.
Work with your tax professional to figure the credit on Form 8994. The IRS says its Section 45S FAQs don't yet reflect all of the 2025 changes, and the latest Form 8994 instructions (December 2024) were written before them, so check IRS.gov for updates.

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FAQ

Is the paid family leave tax credit permanent?

Yes. The One, Big, Beautiful Bill Act removed the provision that ended the credit for tax years beginning after December 31, 2025, and the IRS and Treasury say the credit is now permanent.

How much is the paid family and medical leave credit?

It ranges from 12.5% to 25% of wages paid to qualifying employees while they are on family and medical leave, for up to 12 weeks per employee per year. The percentage depends on how much of normal pay the leave replaces, starting at 12.5% when leave pays 50% of wages and rising 0.25 percentage points for each percentage point above 50%.

Can I claim the credit for paid leave insurance premiums?

Yes, starting with tax years that begin after December 31, 2025. If you have a paid family and medical leave insurance policy in force during the year, you can elect to base the credit on the premiums you pay instead of the wages paid during leave.

Does paid leave required by my state count?

Partly. Under the 2025 changes, leave paid by a state or local government or required by state or local law counts when deciding whether your policy meets the federal rules, but it isn't counted when figuring the amount of the credit.

Do part-time employees count?

Yes, if they customarily work at least 20 hours a week and meet the other rules. Their required leave is prorated based on the hours they are expected to work.

Does regular PTO or sick leave qualify?

No. Paid vacation, personal, or sick leave doesn't count unless it is specifically for a family and medical leave reason.

What form do I use to claim the credit?

IRS Form 8994, Employer Credit for Paid Family and Medical Leave. The credit is part of the general business credit, and you must reduce your deduction for the wages or premiums by the amount of the credit. You can also elect not to take the credit.