Is there a tax credit for employers that offer paid family and medical leave?

Under Section 45S of the Internal Revenue Code, employers that voluntarily offer qualifying employees up to 12 weeks of paid family and medical leave annually under a written policy may claim a tax credit for a portion of the wages paid during that leave. Originally set to expire at the end of 2019, the tax credit has been extended through 2025.

A qualifying employee is one who has been employed by the employer for at least one year and in the previous year was paid no more than 60 percent of the "highly compensated employee" dollar amount on an annual basis. The Internal Revenue Service adjusts this dollar amount each year. For 2023, an eligible employee's compensation in 2022 cannot have exceeded $81,000.

Section 45S uses the definitions for leave eligibility found in the Family and Medical Leave Act (FMLA), but the tax credit applies to all employers, not just those covered by the FMLA.

To receive the credit, employers must have a written policy that:

• Provides at least two weeks of paid time off for employees taking leave for qualifying reasons that would otherwise be unpaid under the FMLA.
• Compensates employees with a minimum of 50 percent of their regular earnings for covered absences.

The tax credit will cover 12.5 percent of the benefit's costs if workers receive half of their regular earnings, rising incrementally to as much as 25 percent if workers receive their entire regular earnings. Employer can claim the tax credit using IRS Form 8994. The instructions for Form 8994 include worksheets for calculating paid family and medical leave credits and the applicable percentage to be used.

The credit does not apply if paid leave is mandated by state or local law.

An employer does not have to provide paid leave for every type of FMLA leave to claim the credit. For example, it can provide paid leave for parental leave but not for a serious medical condition, and it can also offer different amounts of paid leave in different circumstances. An employer's policy could therefore provide:

• 10 weeks of leave at 100 percent pay to bond with a new child, but only six weeks of leave at 60 percent pay to care for a family member with a serious illness.
• Two weeks of FMLA-type leave at 50 percent pay for all qualifying employees and an additional two weeks of FMLA-type leave at 50 percent pay for qualifying employees who have worked at the company for five or more years.

Additional information on the tax credit is available from the Congressional Research Service and the IRS.