Updated January 16, 2020
Employer Tax Credit for Paid Family and Medical Leave
The employer credit for paid family and medical leave
Tax credits cannot be claimed for leave paid by state or
(Internal Revenue Code [IRC] §45S) was enacted as part of
local governments, or for leave that is required by state or
the 2017 tax revision (P.L. 115-97) (commonly referenced
local law. Thus, this tax incentive does not reduce the cost
as the “Tax Cuts and Jobs Act,” or TCJA, the title of the
of providing leave in jurisdictions where employers are
House-passed version of the bill). When enacted, this credit
required to do so by a state or local authority.
was made available for two years, 2018 and 2019. The
credit’s primary sponsor, Senator Deb Fischer, called this
A tax credit can only be claimed for wages paid for family
credit a “two-year pilot program,” after which there would
and medical leave. If an employer provides paid leave (e.g.,
be an opportunity to evaluate whether the credit was
vacation, personal, or sick leave) that is not specifically set
achieving its intended goals. The credit was extended
aside for a FMLA-qualifying purpose, that leave is not
through 2020 in the Further Consolidated Appropriations
considered FML leave. Family and medical leave is
Act, 2020 (P.L. 116-94). This In Focus (1) provides an
restricted to leave associated with (1) the birth of a child or
overview of the employer credit for paid family and
placement of an adopted or foster child with the employee;
medical leave; and (2) highlights some issues to consider
(2) a serious health condition of the employee or the
when evaluating the credit.
employee’s spouse, child, or parent; (3) an exigency arising
out of the fact that a close relative is a member of the
The Employer Credit for Paid Family
Armed Forces and on covered active duty; or (4) to care for
and Medical Leave
a covered servicemember who is a close relative of the
The employer credit for paid family and medical leave
employee.
(FML) can be claimed by employers providing paid leave
(wages) to employees under the Family and Medical Leave
For employers, there are other requirements associated with
Act of 1993 (FMLA; P.L. 103-3). The credit can be claimed
the credit. To claim the credit, an employer must have a
for wages paid during tax years that begin in 2018, 2019,
written family and medical leave policy in effect. The
and 2020.
policy cannot exclude certain classifications of employees
(e.g., unionized employees). Additionally, a qualified
The credit rate depends on how much employers provide
employer is required to claim the credit, unless the
for paid FML, relative to wages normally paid. If paid leave
employer opts out. For employers, the amount of wages and
is 50% of wages normally paid to an employee, the tax
salaries deducted as a business expense is reduced by the
credit is 12.5% of wages paid. If paid leave is 100% of
amount of credit claimed. Further, the credit cannot be
wages normally paid to an employee, the tax credit is 25%
claimed if wages have been used to calculate another tax
of wages paid. The credit rate increases from 12.5% to 25%
credit (to avoid a double tax benefit). The credit is part of
ratably as leave wages increase from 50% to 100% of
the general business credit, meaning that unused credits
wages normally paid. No credit can be claimed for paid
from the current tax year can be carried back one year
FML that is less than 50% of wages normally paid. Further,
(offsetting the prior year’s tax liability) or carried forward
no credit can be claimed for wages paid on leave that
up to 20 years to offset future tax liability. The credit is
exceed an employee’s normal wage rate.
allowed against the alternative minimum tax (AMT).
The credit can only be claimed for paid FML provided to
Legislative Background
certain lower-compensated employees. For wages paid to
The employer credit for paid family and medical leave was
an employee to be credit eligible, compensation to the
added to the IRC by P.L. 115-97. The credit that was
employee in the preceding year cannot exceed 60% of a
included in this bill was similar to what had been proposed
“highly compensated employee” threshold. For 2019,
in the Strong Families Act (S. 1716) in the 115th Congress,
employee compensation in 2018 cannot have exceeded
and earlier proposals with the same title.
$72,000. Further, for an employer to claim a credit for
wages paid to an employee, the employee must have been
The credit was extended for one year, through 2020, by the
employed by the employer for at least 12 months.
Further Consolidated Appropriations Act, 2020 (P.L. 116-
94). Other legislation introduced in the 116th Congress
The amount of paid FML wages for which the credit is
proposes extending the credit through 2022 (the Paid
claimed cannot exceed 12 weeks per employee per year.
Family Leave Pilot Extension Act, S. 1628/H.R. 4964).
Further, all qualifying employees must be provided at least
two weeks of paid FML for an employer to be able to claim
Revenue Loss of the Credit
the credit (the two-week period is proportionally adjusted
When the credit was first enacted, the Joint Committee on
for part-time employees).
Taxation (JCT) estimated it would reduce federal revenue
by $4.3 billion between FY2018 and FY2027. Most of the
https://crsreports.congress.gov

---

link to page 2 link to page 2
Employer Tax Credit for Paid Family and Medical Leave
revenue loss was to occur in FY2019 and FY2020, as the
Will the Credit Increase Paid Leave?
credit was scheduled to expire at the end of calendar year
Providing a tax credit for employers that provide paid FML
2019. Extending the credit through 2020 was estimated to
should, on the face of it, tend to increase access to this
reduce federal revenue by an additional $2.2 billion
benefit. How effective the credit will be at achieving this
between FY2020 and FY2029. Revenue losses, however,
goal remains an open question.
are expected beyond FY2020 as businesses carry forward
Will the credit, as currently structured, provide a large
unused credits from 2018 to 2020 to offset future tax
enough incentive to cause employers to change their
liability. Extending the provision through the 10-year
behavior (e.g., provide a benefit they do not currently
budget window (FY2019-FY2028) would result in revenue
provide)? If the credit itself does not motivate employers to
losses of $22.0 billion, according to the Congressional
provide paid FML, then employers that provide paid FML
Budget Office (CBO).
for other reasons may receive a “windfall” in reduced tax
Policy Considerations
liability. Currently, large employers and employers of
management and professional employees are most likely to
The employer credit for paid FML is targeted at a group
provide paid family leave. Employers of management and
that is less likely to have access to paid family leave: low-
professional employees, however, are less likely to have
and moderate-income workers. In 2019, 19% of all workers
large shares of employees below the wage threshold.
had access to paid family leave. However, in 2019, 30% of
workers in the top 25% of wage earners had access to paid
Employers that provide paid FML to qualified employees
family leave. For those in the lowest 25% of wage earners,
for other reasons, such as to attract high-quality talent, will
9% had access to paid family leave. For background, see
be able to claim the credit even though their benefit policies
CRS Report R44835, Paid Family Leave in the United
have not changed. If most of the credit’s beneficiaries are
States, by Sarah A. Donovan.
employers that would have provided paid FML without the
credit, then the credit is not a particularly efficient
The share of workers with access to paid family leave has
mechanism for increasing paid FML.
increased in recent years (see Figure 1). The share of
workers in lower-income groups with access to paid family
There is also the possibility that employers choose to
leave has increased faster than the share in higher-income
substitute credit-eligible paid FML for other forms of leave.
groups. As a result, the ratio of the share of workers in the
An employer could reduce the amount of paid sick,
highest income group having access to paid family leave,
personal, or vacation time off, knowing that employees use
relative to the share of workers in the lowest income group
this time for paid family and medical leave purposes. By
having access to paid family leave, has fallen. Although
making this choice, when employees take leave for FMLA
access to paid family leave has increased across all income
purposes, the employer would be allowed a tax credit. If
groups, there remains a gap in paid FML benefits between
other benefits are scaled back in favor of tax-preferred
lower- and higher-wage workers.
FMLA leave, employees may not be better off.
Figure 1. Paid Family Leave by Wage Category
Options Related to the Current Employer Credit
2010-2019
There are several policy options for the employer credit for
paid family and medical leave. First, the credit could be
allowed to expire as scheduled. Second, the credit could be
extended. Third, the credit could be made permanent. Any
extension of the credit could also include a range of
potential modifications.
A possible rationale for extending the credit is that there has
been limited opportunity for evaluation. Over time, as more
data become available, one way to examine whether the
credit has been effective could be to look at the gap in paid
FML benefits between lower- and higher-wage workers. As
shown in Figure 1, this gap has persisted, although in
recent years the share of lower-wage workers with access to
paid FML has increased faster than the share of higher-
wage workers with this type of leave benefit.

Source: Bureau of Labor Statistics (BLS).
Any extension of the credit will reduce federal tax
revenues, all things equal. A permanent extension of the
Notes: Average hourly wages are $13.80, $20.00, and $32.21 at the
credit could be expected to reduce revenues by about $22
25th, 50th, and 75th percentiles, respectively, in 2019.
billion (over a 10-year budget window). An issue to
consider is how much of this $22 billion is claimed by
Some workers who do not have paid family and medical
taxpayers that would not have provided paid FML without
leave may be able to use other forms of paid leave (e.g.,
the tax incentive.
paid vacation, sick, or personal leave) following the birth or
adoption of a child or for their own serious health
condition, or that of a close relative.
Molly F. Sherlock, Specialist in Public Finance
IF11141
https://crsreports.congress.gov

---

Employer Tax Credit for Paid Family and Medical Leave


Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11141 · VERSION 3 · UPDATED

---