What business owners need to know about the new §45S rules under the One Big Beautiful Bill Act (OBBBA)
Paid family and medical leave has become one of the most sought‑after employee benefits in the country — but historically, it’s also been one of the hardest for employers to afford. Congress created the Paid Family & Medical Leave Tax Credit (IRC §45S) in 2017 to encourage employers to offer paid leave, but the rules were narrow, the credit was temporary, and very few businesses could qualify.
That era is over.
The One Big Beautiful Bill Act (OBBBA) permanently extends the §45S credit and dramatically expands who can qualify and how the credit can be claimed. Beginning in 2026, employers can choose between a wage‑based credit or a premium‑based credit, and employers in state‑mandated PFML states can finally participate.
If you’ve ever thought, “Paid leave sounds great, but we can’t afford it,” the new §45S rules may change that calculation.
This guide breaks down everything business owners need to know.
What the §45S Credit Is — In Simple Terms
The §45S credit is a federal tax credit for employers who provide paid family and medical leave to qualifying employees. It’s a general business credit, meaning:
- It directly reduces your tax liability
- Unused credits can be carried back 1 year and carried forward 20 years
- It can be used alongside many other credits (as long as the same wages aren’t double‑counted)
The credit is now permanent, giving employers long‑term certainty to build paid leave into their compensation strategy.
Two Ways to Claim the Credit (Starting 2026)
OBBBA gives employers a choice:
1. Wage‑Based Credit (Available Now and After 2026)
You can claim a credit equal to 12.5% to 25% of wages paid during qualifying leave.
- Pay 50% of normal wages → 12.5% credit
- Pay 100% of normal wages → 25% credit
- Applies for up to 12 weeks per employee per year
2. Premium‑Based Credit (New in 2026)
You can claim a credit equal to 12.5% to 25% of insurance premiums you pay for PFML coverage.
- Applies even if no employees take leave
- Applies to employer‑paid premiums only
- Applies to STD, PFML riders, stand‑alone PFML policies, and private PFML plans
- Applies only to the employer‑funded portion of premiums
- Premiums paid into state PFML funds do not qualify
This option is a game‑changer for small and midsize employers who want predictable costs.
Who Qualifies as an Employer?
Any employer can qualify — regardless of size — as long as they meet the requirements below.
You do NOT need to be covered by the FMLA.
Even employers with fewer than 50 employees can claim the credit.
You do NOT need to self‑fund paid leave.
You can qualify through:
- A self‑funded paid leave policy
- A fully insured PFML or STD policy
- A private PFML plan in a state‑mandated PFML jurisdiction (credit applies to excess benefits)
The Written Policy Requirement — And the New Exception
To qualify, employers generally must have a written PFML policy that:
- Provides at least two weeks of paid leave for full‑time employees
- Provides a proportional amount for part‑time employees
- Pays at least 50% of normal wages
- Covers employees who have worked at least one year (or six months beginning in 2026)
- Includes non‑interference language required by the IRS
- Restricts leave to FMLA‑qualifying reasons only
NEW: The “Substantial and Legitimate Business Reason” Exception
OBBBA introduces a narrow exception:
If an employer does not have a written policy, it may still qualify if it can demonstrate a substantial and legitimate business reason for the omission.
The IRS has not yet defined what qualifies — employers should not rely on this without professional guidance.
Employee Eligibility Requirements
A qualifying employee must:
- Have worked for you for one year (or six months starting 2026)
- Customarily work 20+ hours per week (starting 2026)
- Earn no more than 60% of the HCE threshold in the prior year
- For 2025, this cap is $96,000
- For part‑time employees, this is based on annualized compensation
Owners and certain family members do not qualify.
What Counts as Paid Family & Medical Leave?
Leave must be specifically designated for FMLA‑qualifying reasons:
- Birth, adoption, or foster placement
- Care for a spouse, child, or parent with a serious health condition
- The employee’s own serious health condition
- Military exigency leave
- Care for an injured service member
What does NOT count:
- Vacation
- Sick leave
- Personal leave
- PTO banks that can be used for non‑FMLA reasons
- State‑mandated paid leave
- Leave paid by state PFML programs
- Leave paid under insurance policies not funded by the employer
STD can count — if it meets the rules
Employer‑paid STD or PFML riders can qualify if:
- They are specifically designated for FMLA‑type leave
- They meet the 50% wage‑replacement minimum
- They meet all §45S eligibility rules
State‑Mandated PFML: What’s New
Under prior law, employers in PFML states were effectively shut out of the federal credit.
OBBBA changes that.
State‑mandated PFML can now count toward eligibility.
You can use state‑mandated benefits to meet:
- The two‑week minimum
- The 50% wage‑replacement minimum
But the credit only applies to employer‑funded benefits above the state requirement.
Examples of employer‑funded “excess” benefits that qualify:
- Topping up a 60% state benefit to 100%
- Extending leave beyond the state‑mandated duration
- Providing PFML benefits to employees not covered by the state program
- Purchasing private PFML insurance that exceeds state minimums
Current PFML‑mandate states:
CA, CO, CT, DC, MA, NJ, NY, OR, RI, WA
Future PFML states:
DE (2026), ME (2026), MD (2026), MN (2027)
Controlled Group Rules
Under IRC §414(b) and (c):
- All commonly owned entities (80%+ ownership) are treated as one employer
- All must have a qualifying policy unless a substantial and legitimate business reason exists
- Each entity generally makes its own election to claim or not claim the credit
- Consolidated groups elect through the common parent
How the Credit Is Calculated
Wage‑Based Credit
- 12.5%–25% of employer‑paid wages
- Up to 12 weeks per employee
- Wage base capped at hours of leave × normal hourly wage
Premium‑Based Credit
- 12.5%–25% of employer‑paid premiums
- Applies even if no leave is taken
- Applies only to employer‑funded premiums
- State PFML payroll taxes are not creditable
Deduction vs. Credit
You must choose:
- Deduct premiums OR take the credit
- You cannot do both for the same dollars
- If you take the credit, you must reduce your deduction by the credit amount
In many cases, the credit produces a larger net tax benefit than the deduction alone.
How PFML Interacts With FMLA
Employers should:
- Run PFML and FMLA concurrently when both apply
- Track PFML and FMLA separately
- Notify employees of rights under both laws
- Understand that PFML does not replace FMLA
- Adopt a policy that prevents employees from “stacking” unpaid FMLA and paid PFML unless intended
For multistate employers, a national policy that meets or exceeds the most generous state requirement can simplify administration.
Why This Matters for Employers
The expanded §45S credit can:
- Offset 12.5%–25% of wages or premiums
- Reduce turnover and training costs
- Improve recruiting and retention
- Boost morale and loyalty
- Support employees during critical life events
- Help small employers offer competitive benefits
- Provide predictable costs through insured PFML programs
- Deliver meaningful tax savings — even in PFML‑mandate states
This is one of the most employer‑friendly benefit incentives Congress has ever enacted.
Final Thoughts
The permanent §45S credit — combined with the new premium‑based option and expanded eligibility rules — creates a powerful opportunity for employers to offer paid family and medical leave in a financially sustainable way.
Whether you already offer paid leave, operate in a PFML‑mandate state, or are considering implementing a new program, now is the time to evaluate your policy and determine how to maximize the federal credit.