Employer Guidance on Paid Family and Medical Leave Credit Issued

Employers now have more clarity on the newly expanded paid family and medical leave (PFML) tax credit.

The IRS and the Treasury Department issued a notice Aug. 5 on the tax credit for employers offering qualifying paid family and medical leave, unveiling new details on how employers can take advantage of incentives. The guidance explains how employers can claim the permanently expanded credit enacted under the 2025 Working Families Tax Cuts legislation and outlines several changes intended to broaden employer participation. 

Perhaps the most significant change is that employers may now claim the credit for qualifying paid family and medical leave insurance premiums — not just wages paid directly to employees while they are on leave. The clarification could benefit employers that fund leave through insurance rather than self-funding wage replacement.

Employees may use the leave to recover from a serious health condition or to care for certain family members with serious health conditions. The tax credit for paid family and medical leave was first established under President Donald Trump’s 2017 tax cuts bill. 

“Hardworking Americans should not have to choose between caring for a loved one and earning a paycheck,” Treasury Secretary Scott Bessent said in a statement. “The Working Families Tax Cuts permanently expands the federal paid family and medical leave tax credit, giving businesses, especially small businesses, greater incentives to provide paid leave so workers can care for a newborn or other family member or recover from a serious illness without sacrificing their financial security.”

Related Policy: Paid Family and Medical Leave Policy 

Beginning in 2026, employers providing paid family and medical leave that meet certain requirements can take advantage of a general business tax credit ranging from 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave each taxable year. The guidance also allows employers to claim the credit for qualifying PFML insurance premiums, providing an alternative to claiming the credit solely for wages paid during leave.

The guidance also clarifies several additional provisions, including: 

• Expanded eligibility: Employers can claim the credit for employees with at least six months of service and for part-time employees who customarily work 20 hours or more per week. 

• State and local mandates: Employers can count leave provided under state or local mandates toward the eligibility for this federal tax credit, but not toward the credit calculation.  

For HR leaders, the guidance provides greater certainty when evaluating paid leave strategies, including in states requiring paid leave. Employers that previously assumed they were ineligible because they relied on insured leave programs may now qualify for the credit, potentially reducing the cost of offering paid family and medical leave.

The tax credit may encourage broader adoption of paid leave benefits, as the federal Family and Medical Leave Act (FMLA) requires only unpaid leave to eligible employees of covered employers.  

According to the SHRM 2026 Employee Benefits Survey, while most employers (84%) offer leave to care for immediate family as defined by federal FMLA (the employee’s spouse, child or parent), just 29% of employers offer family leave above federal FMLA leave (time beyond what is required by law), and 36% offer paid leave to care for immediate family.