‘One Big Beautiful Bill Act’ Tax Update: Paid Family & Medical Leave Tax Credit Enhanced and Made Permanent

Did you know that your company could be benefitting from a tax credit for offering Paid Family and Medical Leave (PFML)? In order to encourage employers to offer PFML, IRS Code Section 45S allows employers to claim a credit equal to a percentage of wages they pay to qualifying employees while they’re on leave.

PFML covers the following scenarios:

• Birth of a child
• Adopting or fostering a child
• Caring for a spouse, child or parent with serious health condition
• Employee dealing with a health issue that makes them unable to perform the functions of their position
• Exigency related to a family member in the Armed Forces
• Care for a family member that is a service member

To claim the credit, an employer generally must have a written policy providing at least 2 weeks of PFML annually (with a maximum limit of 12 weeks) to full-time employees (prorated for part-time employees) who make below a certain compensation threshold (e.g., $93,000 cap for 2025). Additionally, the employee’s leave wages cannot be less than 50% of their normal wages.

The minimum percentage for the credit is 12.5% and increases 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%. (IRS.gov PFML FAQs)

While this tax credit has existed since the beginning of 2018 when it was implemented as part of the 2017 Tax Cuts and Jobs Act (TCJA), the recently passed “One Big Beautiful Bill Act” (OBBBA) made some revisions to the incentive beginning with 2026 tax years. Originally, the provision was effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2026. The OBBBA now makes this tax credit permanently available. Key changes to the parameters of the provision include:

• Originally, qualifying employees were those that had been employed for over 1 year. Employers may lower the eligibility period to 6 months.
• Employers can now choose to claim a credit of a percentage of premiums paid with respect to in-force policies for PFML rather than claiming a credit for wages paid during PFML.

The above is a quick thumbnail and there are special rules with respect to state mandated PFML treatment. 

If you have any further questions about the above tax credit, please contact Brigette Renaud. The above is not intended to provide legal advice.