Expanding federal paid leave support: What’s new in the PFML tax credit

The passage of the “One Big Beautiful Bill Act” makes permanent and enhances a paid family and medical leave (PFML) tax credit that had been part of the 2017 Tax Cuts and Jobs Act, providing employers with greater certainty and incentive when structuring leave benefits.

Previously, the tax credit could only be applied to wages paid during an actual leave event. Under the new law, it may also be applied to premiums paid for a PFML-compliant insurance program. This means an employer may claim the credit on premiums for PFML programs that, at minimum:

• Have a written policy providing at least two weeks of paid leave
• Provide wage replacement of at least 50% or more of normal wages during leave
• Apply to a qualifying employee — specifically employees who have worked at least six months and earn less than 60% of a highly compensated employee threshold under IRC §414(q) (for 2025, that would be $96,000)

Additionally, employers in states with mandated leave programs were previously excluded from claiming the credit on employee benefits already required by law. Under the new provision, if the employer’s benefits exceed the state mandate, the credit may be applied to the difference between the employer’s offering and the state requirement.

Employers may claim the tax credit — a sliding scale of 12.5% (for 50% of wage replacement) up to 25% (for 100% of wage replacement)* — on either premiums or wages paid beginning with taxable years after December 31, 2025. For self-insured employers, additional rulemaking and/or guidance from the Internal Revenue Service will likely be required to establish how to claim an equivalent premium amount.

The PFML Tax Credit remains the only formal federal law that’s been passed regarding paid family medical leave. While 15 states and the District of Columbia — along with many municipalities — have enacted laws mandating programs, the federal tax credit is designed to encourage voluntary, employer-based adoption of PFML programs, while avoiding the regulatory complexity of complying with state-by-state requirements.