Updated February 27, 2023
Employer Tax Credit for Paid Family and Medical Leave
Employers providing paid family and medical leave to their
aside for a FMLA-qualifying purpose, that leave is not
employees may be able to claim a tax credit under Section
considered FML leave. Family and medical leave is
45S of the Internal Revenue Code (IRC). This In Focus (1)
restricted to leave associated with (1) the birth of a child or
provides an overview of the employer credit for paid family
placement of an adopted or foster child with the employee;
and medical leave; and (2) highlights potential issues to
(2) a serious health condition of the employee or the
consider 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 through
written family and medical leave policy in effect. The
2025.
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
enacted as part of the 2017 tax revision (P.L. 115-97)
employee in the preceding year cannot exceed 60% of a
(commonly referenced as the “Tax Cuts and Jobs Act,” or
“highly compensated employee” threshold. For 2023,
TCJA). When enacted, this credit was made available for
employee compensation in 2022 cannot have exceeded
two years, 2018 and 2019. The credit’s primary sponsor,
$81,000. Further, for an employer to claim a credit for
Senator Deb Fischer, called this credit a “two-year pilot
wages paid to an employee, the employee must have been
program,” after which there would be an opportunity to
employed by the employer for at least 12 months.
evaluate whether the credit was achieving its intended
goals. The credit was extended through 2020 in the Further
The amount of paid FML wages for which the credit is
Consolidated Appropriations Act, 2020 (P.L. 116-94) and
claimed cannot exceed 12 weeks per employee per year.
through 2025 in the Taxpayer Certainty and Disaster Tax
Further, all qualifying employees must be provided at least
Relief Act of 2020 (Division EE of P.L. 116-260).
two weeks of paid FML for an employer to be able to claim
the credit (the two-week period is proportionally adjusted
Estimated Revenue Loss of the Credit
for part-time employees).
When the credit was first enacted, the Joint Committee on
Taxation (JCT) estimated the two-year tax credit would
Tax credits cannot be claimed for leave paid by state or
reduce federal revenue by $4.3 billion between FY2018 and
local governments, or for leave that is required by state or
FY2027. The one-year extension through 2020 was
local law. Thus, this tax incentive does not reduce the cost
estimated to reduce federal revenue by an additional $2.2
of providing leave in jurisdictions where employers are
billion between FY2020 and FY2029, while the subsequent
required to do so by a state or local authority.
extension through 2025 was estimated to reduce federal
revenues by an additional $3.8 billion between FY2021 and
A tax credit can only be claimed for wages paid for family
FY2030. While most of the revenue losses are expected to
and medical leave. If an employer provides paid leave (e.g.,
occur before the credit’s termination, revenue losses are
vacation, personal, or sick leave) that is not specifically set
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Employer Tax Credit for Paid Family and Medical Leave
expected after the credit’s termination date as businesses
Will the credit, as currently structured, provide a large
carry forward unused credits to offset future tax liability.
enough incentive to cause employers to change their
behavior (e.g., provide a benefit they do not currently
JCT estimates of the cost of the credit’s extension have
provide)? If the credit itself does not motivate employers to
tended to decline over time. One possible explanation is
provide paid FML, then employers that provide paid FML
that the credit cannot be claimed for state- or locally
for other reasons may receive a “windfall” in reduced tax
mandated leave. As more states have established state-level
liability. Currently, large employers and employers of
paid family or medical leave programs, the number of
management and professional employees are most likely to
taxpayers potentially able to claim the credit has declined.
provide paid family leave. Employers of management and
Policy Considerations
professional employees, however, are less likely to have
large shares of employees below the wage threshold.
The employer credit for paid FML is targeted at a group
that is less likely to have access to paid family leave: low-
Employers that provide paid FML to qualified employees
and moderate-income workers. In 2022, 25% of all workers
for other reasons, such as to attract high-quality talent, will
had access to employer-provided paid family leave.
be able to claim the credit even though their benefit policies
However, in 2022, 38% of workers in the top 25% of wage
have not changed. If most of the credit’s beneficiaries are
earners had access to such paid leave, while 13% of those in
employers that would have provided paid FML without the
the lowest 25% of wage earners had access. For
credit, then the credit is not a particularly efficient
background, see CRS Report R44835, Paid Family and
mechanism for increasing paid FML.
Medical Leave in the United States, by Sarah A. Donovan.
There is also the possibility that employers choose to
The share of workers with access to paid family leave has
substitute credit-eligible paid FML for other forms of leave.
increased in recent years (see Figure 1). Over time, the
An employer could reduce the amount of paid sick,
share of workers in lower-income groups with access to
personal, or vacation time off, knowing that employees use
paid family leave has increased at a faster rate than the
this time for paid family and medical leave purposes. By
share in higher-income groups. As a result, the ratio of the
making this choice, when employees take leave for FMLA
share of workers in the highest income group having access
purposes, the employer would be allowed a tax credit. If
to paid family leave, relative to the share of workers in the
other benefits are scaled back in favor of tax-preferred
lowest income group having access to such leave, has
FMLA leave, employees may not be better off.
fallen. Although access to paid family leave has increased
Options Related to the Current Employer Credit
across all income groups, there remains a gap in paid FML
There are several policy options for the employer credit for
benefits between lower- and higher-wage workers.
paid family and medical leave. First, the credit could be
Figure 1. Paid Family Leave by Wage Category
allowed to expire as scheduled. Second, the credit could be
extended. Third, the credit could be made permanent. Any
2010-2022
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. An evaluation
of the credit could also consider how many taxpayers
claimed the credit for leave that would have been provided
absent the tax incentive, as opposed to leave employers

provided in response to the credit being available.
Source: Bureau of Labor Statistics (BLS).
Notes: Values of $16.21, $22.36, and $35.29 represent the 25th, 50th,
The credit could be modified to address a potential range of
and 75th average hourly wage percentiles, respectively, in 2022.
policy considerations. For example, the credit could be
redesigned to provide a larger incentive to employers with
Some workers who do not have paid family and medical
few employees. Employees at smaller establishments are
leave may be able to use other forms of paid leave (e.g.,
less likely to have access to paid family leave than
paid vacation, sick, or personal leave) following the birth or
employees at larger establishments. Another option might
adoption of a child or for their own serious health
be to provide a tax credit to reduce the cost of leave
condition, or that of a close relative.
insurance premium payments paid by employers purchasing
Will the Credit Increase Paid Leave?
leave insurance for their employees. This could potentially
Providing a tax credit for employers that provide paid FML
support state-level opt-in leave insurance policies.
should, on the face of it, tend to increase access to this
Molly F. Sherlock, Specialist in Public Finance
benefit. How effective the credit will be at achieving this
goal remains an open question.
IF11141
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Employer Tax Credit for Paid Family and Medical Leave


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https://crsreports.congress.gov | IF11141 · VERSION 4 · UPDATED