The temporary tax credit for employers who offer paid family and medical leave (PFML) will become permanent in 2026. The credit is worth 12.5% of the employee’s wages for a leave period and goes up by 0.25% for each percentage point of wages paid over 50%, up to 25%.
The One Big Beautiful Bill Act passed by Congress last summer both makes the tax credit permanent and expands it in two ways:
- In addition to claiming a credit for wages paid, employers also can get a tax credit for a portion of insurance premiums paid for an employee on PFML.
- It also now offers a credit for employers in states with mandated PFML laws, where employers previously were not eligible. Now, employers who provide more than their state’s mandated paid medical leave can claim a tax credit on the wages and insurance premiums paid during leave in excess of state requirements.
Beginning Jan. 1, employers can choose between two methods for calculating the credit -- a wages-paid method or a newly introduced premium-based method. A report from the accounting firms Moss Adams and Baker Tilly explains how the two options work.
Wages-paid method. Employers in states with mandatory programs now can claim the federal PFML tax credit for employer-funded paid leave that exceeds state-mandated benefits. This change allows employers to capture the credit for any supplemental leave they voluntarily provide, such as increasing a 60% state wage replacement to 100% or extending the duration of leave beyond the state-mandated period.
The state-funded portion of benefits is considered in determining whether the 50% wage replacement requirement is met. After that threshold is satisfied, the credit applies to the employer-funded portion of leave wages that exceed what the state mandates or reimburses. This expansion enables employers in PFML-mandated states, who previously assumed the credit was off-limits due to state mandates, to now realize meaningful federal tax savings by offering leave benefits that go above and beyond baseline state requirements.
Premium-based method. The premium-based method allows employers to claim the credit without requiring an employee to take leave as long as the employer maintains an insurance policy providing PFML coverage. The credit is calculated as a percentage of the insurance premiums paid or incurred by the employer rather than wages paid. The applicable percentage mirrors the structure of the wage-based credit in which the credit ranges from 12.5% to 25% of insurance premiums.
Additional guidance from the IRS is anticipated regarding the application of the premium-based method for calculating the PFML credit. This guidance is expected to clarify how employers should allocate state-mandated contributions and employer-funded benefits when determining eligible wages for the credit.
To qualify under either method, an employer must have a written policy that provides qualifying employees with at least two weeks of PFML annually, paid at a minimum of 50% of their regular wages.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.