Initially in effect temporarily for 2018-2019 – and subsequently extended through 2025 –  the IRC Section 45S family and medical leave (FML) federal income tax credit has not received much attention from employers. As part of the One Big Beautiful Bill Act (OBBB), the FML credit has been made permanent, effective as of 2026, and has been revised to increase its attractiveness to employers.

Pre-OBBB Section 45S credit

Pursuant to IRC Section 45S, the FML tax credit has been available to employers that provide paid family and medical leave to certain employees under the Family and Medical Leave Act of 1993 (FMLA). Criteria for the credit include:

• Available only for family and medical leave pay of individuals employed by a for-profit employer for at least one year (not available to tax-exempt employers), whose annualized pay for the immediately preceding year did not exceed 60% of that year’s IRC Section 414(q) “highly compensated employee” compensation threshold (for a 2025 or 2026 FML credit:  $160,000 x 60% = $96,000)
• The leave must be for:
  • The birth of and care for an employee's child or the employee’s adoption or foster care of a child
  • The care of the employee's spouse, child, or parent having a serious health condition
  • A serious health condition rendering the employee unable to perform the functions of their position
• An employee's spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the armed forces, or to care for a service member who is the employee's spouse, child, parent, or next of kin
• No FML credit is available for wages paid under the employer’s regular vacation, personal leave (PTO), or medical/sick leave policies, or by the employer in an amount required by state or local law.
• The leave pay must be for a period of not less than two weeks, at a rate of not less than 50% and not more than 100% of the employee’s regular pay.
  • Leave pay at the rate of 50% generates an FML credit equal to 12.5% of the leave pay wages.
  • The FML credit amount is increased by 0.25% for each percentage point above 50%.
  • Maximum FML credit (for a leave paid at 100% of the regular wage rate) is 25% of the leave pay wages, limited to leave wages of not more than 12 weeks.
  • The employer must reduce its otherwise compensation federal income tax deduction amount by the amount of its claimed FML credit.
• A written employer FML policy is required.

OBBB changes (as of 2026)

• The FML credit can now be claimed in one of two ways:
  • Based on the wages paid by the employer during an employee’s qualifying leave 
  • Based on insurance premiums the employer pays or incurs under qualifying policies used to provide family and medical leave wages – such as a short-term disability policy – during the taxable year. 
    Note: The employer must use the same method for all employees. 
• Employers in the same controlled group are treated as one employer for FML credit purposes. This means all employers in the group must meet the requirements for any of them to claim the credit, including having a written family and medical leave policy. An exception from the written policy requirement may be made for a “substantial and legitimate” business reason.
• The employer’s written family and medical leave policy must include: 
  • At least two weeks of annual family and medical leave for qualifying full-time employees employed for at least one year (or the employer can now elect to use a 6-month requirement)
  • Pro-rated leave for part-time employees working 20 or more hours per week
  • Anti-retaliation and anti-discrimination language as required by law
• In calculating the FML credit, an employer cannot include wages paid by state and local governments or those for leave amounts required under applicable state or local law. Employers can include wages for leave amounts above state or local requirements; however, such leave periods still count toward the minimum two-week leave requirement.

What does CohnReznick think?

To encourage more employers to participate, the OBBB introduced its most significant change: Employers can now claim the FML credit based on insurance premiums they pay to fund family and medical leaves, even if no employee uses the policy during the year. Another welcome change is the ability to claim the FML credit for employees in states and localities that mandate family and medical leaves – but only for amounts above the required minimums. In contrast, the new controlled group requirement adds additional burdens on employers having multiple affiliates within their controlled group. The IRS is expected to provide additional guidance on both these topics.