The Internal Revenue Code (IRC) Section 45S offers a tax credit for eligible employers who offer paid family and medical leave (PFML) to qualifying employees. Although this credit has been available since 2017, many employers found it challenging to meet the original eligibility criteria and were unable to claim the credit.
However, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces substantial revisions to IRC Section 45S which may allow a broader range of employers to benefit from the tax credit. The revised provision takes effect January 1, 2026.
Changes to the PFML Credit: Before and After OBBBA
The OBBBA expanded and simplified the PFML tax credit by making it permanent, reducing the employee tenure requirement, and clarifying eligibility rules. These updates aim to help more employers qualify for the credit and ease compliance. The chart below highlights the key differences before and after OBBBA.
| Feature | Before OBBBA | After OBBBA (Effective Jan 1, 2026 |
| Expiration Date | Temporary (expires December 31, 2025) | Permanent |
| Employee Tenure Requirement | Employed at least 1 year | At least 1 year (or 6 months, at employer’s election) |
| Minimum Leave Duration | At least 2 weeks annually for full-time employees (prorated for part-time) | Same |
| Leave Pay Requirement | At least 50% of normal wages | Same |
| Part-time Employee Eligibility | Must offer prorated leave to part-time employees | Same, but defines part-time employees as working not less than 20 hours per week |
| Qualifying Leave Types | Only for specific family and medical reasons as defined under FMLA | Same |
| Compensation Cap | Not more than 60% of IRC Section 414(q)(1)(B) highly compensated employee limit (e.g., $96,000 in 2025) | Same |
| Credit Calculation | Based on PFML wages or paid leave under employer’s short-term disability program | Based on PFML wages or premiums for PFML insurance policy. Also, clearer rules for salaried/hourly conversion |
| Leaves Required Under State and Local Law | Excluded from calculating PFML tax credit amount and from counting toward amount of PFML provided by employer | Still excluded from tax credit calculation but now counts toward the amount of PFML provided by employer for purposes of determining eligibility. Also, credit is now available in all states, even those with PFML leave mandates. |
| Employer Aggregation | Employers are not aggregated for any purpose including calculating the credit. Each member of a controlled group of corporations and each member of a group of businesses under common control generally makes a separate election to claim or not to claim the credit. | Includes an aggregation rule that treats employers within the same controlled group under IRC section 414(b) and (c) as a single employer. |
Eligibility Requirements
To claim the credit, employers must adopt or update a written PFML policy that includes:
- PFML for employees employed at least 1 year (or 6 months, at the employer’s election).
- At least two weeks of annual PFML for full-time employees, paid at no less than 50% of their normal wages.
- Prorated leave for part-time employees (those who typically work 20 or more hours per week).
- Non-retaliation and non-discrimination provisions for employees exercising rights under the policy.
Employers cannot claim the credit for employees whose prior-year compensation exceeded 60% of the IRC Section 414(q)(1)(B) limit, prorated for part-time employees. For example, in 2026, the credit cannot be claimed for employees who earned more than $96,000 in 2025.
Definition of PFML
PFML must be provided for one or more of the following events, as defined under the Family and Medical Leave Act (FMLA):
- Birth and care of an employee’s child.
- Placement of a child with the employee for adoption or foster care.
- To care for the employee’s spouse, child, or parent who has a serious health condition.
- The employee’s own serious health condition.
- Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty.
- To care for a service member who is the employee’s spouse, child, parent, or next of kin.
It’s important to note that other types of leave such as vacation, medical or sick leave, or personal leave (such as PTO), do not qualify. Leave required by state or local law does not count toward calculating the credit amount but does count toward the two-week minimum leave requirement.
Credit Amount
The credit is based on either a percentage of PFML wages paid by the employer or PFML premiums paid by the employer (under a PFML insurance policy), even if the employee does not use the leave. The base credit is 12.5%, increasing by 0.25% for each percentage point above 50% of normal wages paid. The maximum credit is 25% and applies to up to 12 weeks of PFML per employee.
The maximum PFML credit is limited to the number of hours of PFML provided, multiplied by the employee’s normal hourly wage rate. For salaried employees, this means converting their annual salary into an equivalent hourly rate.
Employers claiming the PFML credit must reduce their wage or salary deduction by the amount of the credit attributable to wages paid during the taxable year. Additionally, wages used to determine any other business credit cannot be used again for the PFML credit under IRC Section 45S.
Aggregation Rule
The OBBBA applies an aggregation rule that treats all employers within the same controlled group under IRC Sections 414(b) and (c) as a single employer for purposes of the tax credit. This means that every member of the controlled group must maintain a written PFML policy that satisfies the credit’s requirements.
However, an exception is available for employers that can demonstrate a substantial and legitimate business reason for not having a written policy. Acceptable reasons do not include the operation of a separate line of business, the rate of wages, the category of jobs, or the application of state and local PFML laws, but may include the grouping of employees of a common law employer.
Remaining Challenges
Despite the expanded eligibility, some hurdles remain. As previously mentioned, while state/local leave can help meet the two-week requirement, it must be excluded from the credit calculation. This may pose administrative challenges, especially in jurisdictions with complex paid leave laws. Also, the compensation cap may limit the number of employees (e.g., highly compensated individuals) for whom the credit can be claimed.
Employer Action
As the 2026 effective date approaches, employers should consider reviewing their current leave policies and compensation structures to determine whether they can take advantage of the revised PFML credit. With the credit now permanent, and more accessible under the OBBBA, proactive planning can help employers not only support their workforce but also realize meaningful tax savings. Consulting with legal and tax advisors now can ensure compliance and maximize the benefit of this enhanced tax incentive.
Additional Resources
- 26 U.S. Code § 45S – Employer credit for paid family and medical leave
- Section 45S Employer Credit for Paid Family and Medical Leave FAQs
- H.R.1 – One Big Beautiful Bill Act, 119th Congress (2025-2026)
- Sequoia Forewords:
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