Why it matters

The expanded credit could create a new tax-saving opportunity for employers that already offer paid family and medical leave or are considering adding or expanding the benefit. 

What is the paid family and medical leave credit?

The paid family and medical leave (PFML) credit, worth up to 25% of wages paid for qualified leave, was slated to expire after 2025. But the Working Families Tax Cut Act (WFTC)  makes it permanent. The law also allows employers to claim the credit for a portion of premiums paid for PFML insurance (instead of wages, but not both) and to reduce the minimum employee work requirement from 12 months to six months.

What’s new? 

1. The credit is here to stay. Previously, the employer credit for paid family and medical leave was subject to expiration. The WFTC changes that by making the credit permanent. Eligible employers can generally claim a credit for providing up to 12 weeks of qualifying paid family and medical leave per employee each taxable year. The credit ranges from 12.5% to 25% of qualifying wages paid, depending on the percentage of an employee's regular wages paid during leave. Employees may use qualifying leave for their own serious health condition or to care for certain family members with serious health conditions. The permanent credit provides greater certainty for employers planning or expanding their paid leave benefits.
2. More employees may now qualify. One of the most significant changes is the expansion of employee eligibility. Beginning in 2026, employers may be able to claim the credit for employees who have been employed for at least six months. The changes also expands eligibility to certain part-time employees who customarily work 20 hours or more per week. This is particularly important for employers with part-time or newer employees who may not have qualified under the previous rules.
3. Employers have a new way to calculate the credit. In addition to calculating the credit based on wages paid to employees while they are on qualifying leave, employers may be able to claim the credit for premiums paid for qualifying paid family and medical leave insurance policies. The IRS's new guidance addresses how the premium-based method works, including how qualifying premiums must be allocated and how employers can elect between the premium-based and wage-based methods. For employers that provide paid leave through an insurance arrangement, the credit may now be available regardless of employees going out on leave.

What about state and local paid leave requirements?

Under the new rules, leave provided under a state or local mandate can generally count toward meeting certain requirements for the federal credit. However, wages paid because they are required under a state or local mandate generally cannot be included when calculating the dollar amount of the federal credit.

That distinction is important. Just because an employer provides leave that helps it qualify for the credit does not necessarily mean every dollar associated with that leave is eligible for the credit calculation. Employers operating in states with their own paid family and medical leave requirements should take a closer look at how their programs interact with the federal rules.

Is your current leave policy eligible?

The expanded credit creates a good opportunity for employers to revisit their existing policies.

Consider asking:

• Does our paid leave policy meet the federal requirements?
• Do more of our employees qualify under the new rules?
• Would a wage-based or premium-based approach provide a better tax benefit?
• How do our state and local leave obligations affect the calculation?
• Should we make changes to our leave program moving forward?

The answers may not be straightforward, particularly for employers with employees in multiple states or complex benefit arrangements. But with the credit now permanent, it may be worth taking another look. The permanent expansion of the paid family and medical leave tax credit gives employers more certainty, and potentially more flexibility, when offering this benefit.