Section 45S Paid Family and Medical Leave Credit: 12.5% to 25% of Wages, Now Permanent

Section 45S is the Internal Revenue Code's general business credit for employers that pay workers during family or medical leave. The IRS states the rule plainly: "Internal Revenue Code Section 45S provides a tax credit for employers who provide paid family and medical leave to their employees."^[2] The credit is figured on Form 8994 and then flows through the General Business Credit on the employer's federal return.^[1]

The range matters because it puts a real dollar number on offering paid leave. The applicable percentage runs from a 12.5% floor to a 25% ceiling, applied to the qualifying leave wages. For a small employer that already pays something during a parental or recovery period, the credit can offset a meaningful share of that cost. For an employer with no paid leave in place at all, Section 45S is the federal government paying up to a quarter of the payroll on qualifying leave once a conforming policy is adopted. Decisions on the policy itself live inside advisory solutions and the credit is claimed through business tax return preparation.

The gate is a written policy. An eligible employer is "an employer with a written policy in place that provides paid family and medical leave and satisfies minimum paid leave requirements"^[2], and the FAQ layers in the two substance tests: the policy must provide "at least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part time)" at a rate "not less than 50 percent of the wages normally paid to the employee."^[6]

Size is not the gate; coverage is. The credit is open to a public company and a Miami accounting practice alike, so long as the policy covers every qualifying classification and runs under rules that mirror the Family and Medical Leave Act. For an employer that is not itself subject to the FMLA (or that has qualifying employees sitting outside Title I of the FMLA), the written policy also has to carry non-interference language the IRS specifies: that the employer will not interfere with, restrain, or deny the exercise of any right the policy provides. A rebuild of an existing handbook is usually faster than inventing one, and sits inside the ordinary payroll services engagement rather than a separate project.

The IRS definition is specific. A qualifying employee is "an employee (as defined in section 3(e) of the Fair Labor Standards Act of 1938 (FLSA), as amended) who has been employed by the employer for 1 year or more, and whose compensation for the preceding year doesn't exceed an amount equal to 60% of the amount applicable for that year under section 414(q)(1)(B)(i)."^[3] That second clause is the one most employers get wrong. The cap moves every year because it floats against the highly compensated threshold, so an employee who sits just above a 2024 line can slide back into eligibility a year later as the base amount steps up.

For leave taken in a 2026 tax year the preceding-year cap is $96,000. The IRS publishes the matching year table in the instructions, so there is no interpretation involved: once prior-year compensation lands at or below that number for the matching year, the one-year-of-service test is the only remaining filter.

The percentage is a function of how much of normal wages the policy pays during leave. The FAQ states the formula plainly: "The minimum percentage is 12.5% and is increased by 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%."^[7] So a policy that pays normal wages at the 50% floor lands at a 12.5% applicable percentage; a policy that pays normal wages in full lands at the 25% ceiling; every rate in between sits on a straight line between the two.

That straight-line rule makes the math predictable. At the 50% rate-of-payment floor, the applicable percentage sits at 12.5%, and at every percentage point above 50% the applicable percentage lifts by 0.25% until it reaches the 25% ceiling. The applicable percentage then multiplies the actual wages paid during qualifying leave, up to the per-employee cap the statute carries.

The policy carries all the eligibility weight, so the drafting is where most of the risk sits. The policy must provide "at least 2 weeks of annual paid family and medical leave to all qualifying employees who aren't part-time employees, and at least a proportionate amount of paid family and medical leave to qualifying employees who are part-time employees"^[6], and must "require a rate of payment that isn't less than 50% of the wages normally paid to the qualifying employee for services performed for the employer"^[6].

The policy also must not exclude any class of qualifying employees. For an employer whose workforce blends union and non-union, salaried and hourly, FMLA-covered and non-covered, this is the sentence that catches a plan whose fine print happens to pay only the exempt tier. The policy must be in place before the leave is taken, and for any qualifying employee outside Title I of the FMLA, non-interference language must appear in the policy and be followed in practice.

State or local paid leave sits next to the federal policy; it never substitutes for it. Any portion of a worker's leave the employer did not fund (because a state fund paid it, or because state law required that leave) is excluded when figuring whether the employer's own policy independently meets the 50% test, so a company that assumes a state program covers the rate floor without changing its own policy is still outside the credit.

The credit's reach per employee is capped at a dozen weeks of leave in a given tax year. The IRS states it directly: "The amount of family and medical leave that may be taken into account with respect to any qualifying employee for any tax year may not exceed 12 weeks."^[5] That is a credit cap, not a benefits cap: a policy may offer more generous leave, but only the wages tied to the first 12 weeks of qualifying leave per employee per year flow into Form 8994.

Two related points often come up. A part-time employee is any employee "customarily employed for fewer than 30 hours per week."^[8] The policy must therefore offer the part-timer a proportionate amount of leave rather than a fixed two weeks. And paid vacation, personal, or ordinary sick leave is not family and medical leave for Section 45S: the IRS requires the leave to be specifically designated for an FMLA purpose, so a general PTO bucket that happens to be used for the birth of a child never flows into the credit.

The headline change: Section 45S is no longer temporary. The IRS confirms that "The Working Families Tax Cuts permanently expands the employer tax credit for paid family and medical leave, providing businesses, particularly small businesses, with greater incentives to offer up to 12 weeks of paid leave."^[9] OBBBA ended the expiration pattern that had let the credit lapse and get reinstated in prior cycles, so for the first time a Miami employer can design a paid-leave policy around a permanent federal credit instead of a window.

The practical expansion matters just as much as permanence. The IRS now describes an "Expanded Eligibility" rule: "Employers can claim the credit for employees with six months of service and for part-time employees customarily working 20 hours or more per week." An "Expanded Coverage" rule lets employers claim the credit for insurance premiums paid to provide leave as well as wages paid during leave. A separate state-and-local rule lets an employer count state-mandated leave toward eligibility, though not toward the credit calculation itself. And "Beginning in 2026, employers can claim the credit for premiums paid for PFML insurance policies, in addition to wages paid during PFML leave."^[10] For a small business that already pays an insurance carrier for a short-term disability or PFML policy, this is a new path to the credit that did not exist a year earlier. A fuller map of the Act's provisions sits inside advisory solutions.

Three failure modes recur. The first is a policy adopted after the fact: an employer pays an employee during leave, learns about Section 45S months later, and tries to backfill a written policy for the earlier year. The IRS requires the written policy to be in place before the leave for which the credit is claimed, so the earlier wages are already outside the credit. The second is a classification exclusion the employer did not notice: a benefits manual that quietly carves out collectively bargained employees, or that limits paid leave to salaried staff, breaks the no-exclusion rule and takes the entire credit off the table for every employee under that policy. The third is state-leave stacking: an employer treats a state fund that pays 50% as satisfying the federal rate test and runs its own policy at a lower rate, which the IRS treats as a failure of the independent 50% requirement.

The reason the stakes matter beyond the credit itself is that Section 45S interacts with the wage deduction. The IRS instructs an employer to "reduce your deduction for salaries and wages by the amount on line 1."^[1] A credit claim that is later disallowed therefore leaves the deduction unreduced, which drives an amended return. And wages used to figure the research credit cannot also be counted here, so an employer running an R&D claim for an professional services tax help client needs the two credits layered correctly before either return goes in.

For an employer in Miami or anywhere else in Florida, the chessboard is unusually open. Florida has no state paid family and medical leave fund, so the state-leave trap that complicates the credit for California or New York employers barely touches Florida payroll. A Florida employer that pays a worker during a parental or caregiving leave, keeps that leave specifically designated for an FMLA purpose, and documents it in a written policy with non-interference language is on a clean path to the credit for every qualifying hour.

The industries where this matters most, in our experience, are hospitality and food service, construction, personal services, and professional-services firms with a tight bench. In each of those, one planned leave for a key employee is a six-figure cost line, and the Section 45S credit is the only federal mechanism that pulls part of that cost back. Restaurant operators in particular can sit this credit next to the FICA tip credit for a layered 2026 position; see the Section 45B FICA tip credit explainer and restaurant and food-service tax help for how those stack.