What is IRC Section 45S? Employer credit for paid family leave
- What is IRC Section 45S?
- Who qualifies for the paid family and medical leave credit?
- Which employees qualify for the FMLA tax credit?
- What types of leave qualify for the paid leave tax credit?
- Written policy requirements for the employer credit for paid family and medical leave
- How to calculate the paid family and medical leave tax credit
- How the credit impacts your wage deduction
- Is the paid leave tax credit still available?
- How to track and document paid leave for credit claims
- Use Ramp's accounting automation to maximize your tax savings
IRC (Internal Revenue Code) Section 45S lets you claim a valuable tax credit for providing paid family and medical leave (PFML) to your employees. Businesses that adopt these policies often see stronger employee retention, improved morale, and reduced turnover costs. The credit helps offset the expense of supporting workers during critical life events.
IRC 45S was created to encourage more employers to offer PFML, and its relevance continues to grow as workplace benefits evolve.
What is IRC Section 45S?
IRC 45S is a federal tax credit that incentivizes employers to provide paid family and medical leave benefits to their employees. Sometimes called the FMLA tax credit, it helps businesses offset the costs of compensating workers during qualifying life events.
The credit was first established under the 2017 Tax Cuts and Jobs Act as a temporary measure. It supported lower-earning employees during events such as childbirth, adoption, or serious medical conditions. Following the passage of the H.R. 1 bill in July 2025, the employer credit for PFML was permanently extended and enhanced, giving employers long-term certainty when planning benefits strategies.
IRC 45 vs. IRC 45S: What's the difference?
It's easy to confuse IRC 45 and IRC 45S, but they are completely different tax provisions:
- IRC 45 provides a renewable electricity production credit, offering incentives for generating power from sources like wind, solar, and biomass
- IRC 45S is the employer credit for paid family and medical leave, rewarding businesses that provide written PFML policies for qualifying employees
Who qualifies for the paid family and medical leave credit?
Eligibility depends on having a written paid leave policy that meets IRS requirements. Any employer with a qualifying policy can claim the credit, regardless of size or industry. There are no restrictions based on revenue or number of employees, making the benefit equally accessible to startups and large corporations.
Eligible employers
The credit is available to a wide range of business structures:
- Corporations: Both C corps and S corps with qualifying policies can claim the credit
- Partnerships and LLCs: Pass-through entities are eligible and can pass the credit through to partners or members
- Sole proprietors: Self-employed individuals with employees on payroll qualify
- Tax-exempt organizations: Nonprofits that meet the written policy requirements can also claim the credit
Employers not subject to FMLA
You don't need to be subject to the Family and Medical Leave Act (FMLA) to claim this credit. If you have fewer than 50 employees, FMLA doesn't apply to you, but you can still take advantage of IRC 45S. You must meet the same written policy standards as larger employers, but there's no minimum headcount requirement.
Which employees qualify for the FMLA tax credit?
Not every employee on your payroll qualifies. The credit only applies to wages paid to qualifying employees as defined by IRS rules.
Wage threshold requirements
To count toward the credit, an employee must have earned no more than $96,000 in the prior tax year (2026 threshold, adjusted annually for inflation). This compensation limit ensures the credit targets lower- and moderate-wage workers. You'll need to verify each employee's prior-year compensation before including their leave wages in your credit calculation.
Employment tenure rules
Employees must have worked for you for at least 1 year before their leave begins. This is calculated using the FMLA standard of 12 months of employment and at least 1,250 hours worked during that period. Employers may choose to reduce the tenure requirement to as little as 6 months, but 1 year is the default threshold.
Your policy must guarantee at least 2 weeks of annual paid leave to all qualifying full-time employees, with proportional coverage for part-time staff working at least 20 hours per week.
What types of leave qualify for the paid leave tax credit?
The leave must align with FMLA-defined purposes. Personal vacation or general PTO doesn't count. Only specific family and medical reasons qualify. You have flexibility in designing your policy, but leave must meet these baseline purposes to count toward the credit.
Birth or adoption of a child
This includes bonding time with a newborn or a newly placed adopted or foster child. Both parents can take qualifying leave, and the leave doesn't need to be taken immediately—it just needs to fall within the time frame your policy allows.
Care for a family member with a serious health condition
A serious health condition is a qualifying illness, injury, or impairment that requires inpatient care or continuing treatment. Qualifying family members include a spouse, child, or parent. This is distinct from caring for extended family. Leave to care for a sibling or grandparent typically doesn't qualify.
Qualifying exigency for military families
This covers leave for issues arising from a family member's active-duty military deployment. Examples include attending military events, arranging childcare, handling financial or legal matters related to the deployment, and short-notice deployment activities.
Employee's own serious health condition
This includes leave for the employee's own medical needs that prevent them from performing their job functions. It covers conditions requiring hospitalization, ongoing treatment, or recovery from surgery or serious illness.
Written policy requirements for the employer credit for paid family and medical leave
A formal, written policy is mandatory. Without it, you can't claim the credit regardless of how much paid leave you actually provide. The IRS requires your policy to meet specific standards before any wages count toward the credit.
Minimum wage replacement percentage
Your policy must guarantee employees receive at least 50% of their normal wages while on leave. This is the minimum threshold to qualify for the base credit. Paying a higher percentage increases your credit rate, so there's a direct financial incentive to be more generous.
Paid leave duration standards
Your policy must offer at least 2 weeks of paid leave per year to all qualifying full-time employees. For part-time employees working at least 20 hours per week, you must prorate the benefit based on their normal work schedule. There's no maximum duration requirement—you can offer more than 2 weeks if you choose.
Non-interference provisions
Your policy must include non-interference provisions, meaning you can't retaliate against or penalize employees who take leave. In practice, this means you cannot demote, fire, reduce hours, or otherwise create negative consequences for an employee who uses this benefit. The IRS takes this requirement seriously, and a policy without these protections won't qualify.
How to calculate the paid family and medical leave tax credit
The credit is a percentage of wages paid during qualifying leave, and the formula rewards employers who pay more during leave periods.
- Base credit rate: 12.5% of wages paid when you provide the minimum 50% wage replacement
- Increased credit: The rate increases by 0.25% for every percentage point of wage replacement above 50%
- Maximum credit: 25% of wages paid when you provide 100% wage replacement
| Wage replacement rate | Credit percentage |
|---|---|
| 50% (minimum threshold) | 12.5% |
| Each additional percentage point above 50% | +0.25% per point |
| 100% (maximum wage replacement) | 25% |
For example, if an employee normally earns $1,000 per week and you pay 75% of their wages during leave ($750), your credit rate is 18.75%. That gives you a credit of $140.63 per week of qualifying leave.
Leave required by state or local laws is not considered when calculating this federal tax credit.
How to claim the credit (Form 8994)
You can claim the IRC 45S credit by filing IRS Form 8994 with your annual business tax return. The form requires details about your leave policy, wages paid, and the employees who took qualifying leave.
Follow these steps:
- Gather your written leave policy and payroll data for employees who took family or medical leave
- Calculate your credit rate based on the percentage of wages you paid (must be at least 50% of normal wages)
- Complete Form 8994 with employee details, weeks of leave taken, and wages paid
- Report your total qualified wages and apply the credit percentage
- File Form 8994 with your business tax return (Form 1120, Form 1120-S, Form 1065, or Schedule C)
In some cases, you may also need to file Form 3800, General Business Credit.
How the credit impacts your wage deduction
Claiming the IRC 45S credit reduces the amount you can deduct as a wage expense. This is a dollar-for-dollar reduction. You can't double-dip by claiming both the full wage deduction and the credit on the same wages.
For example, if you pay $5,000 in qualifying leave wages and claim a $1,250 credit (at the 25% rate), you must reduce your wage deduction by $1,250. Your net deduction for those wages drops to $3,750. In most cases, the credit is still more valuable than the lost deduction because credits reduce your tax liability directly, while deductions only reduce taxable income.
Work with your tax advisor to model the net benefit for your specific situation, especially if you're in a lower tax bracket where the deduction trade-off matters more.
Is the paid leave tax credit still available?
The credit's availability has changed over time due to legislative updates, so it's important to verify its current status before planning around it.
Original effective dates
Section 45S was originally enacted as part of the 2017 Tax Cuts and Jobs Act with an initial expiration date of December 31, 2019. Congress extended it multiple times on a short-term basis, creating uncertainty for employers trying to build long-term benefits strategies.
Recent legislative extensions
The One Big Beautiful Bill Act (Pub. L. 119-21), signed into law in 2025, permanently extended the IRC 45S credit. This gives employers long-term certainty and removes the need to wait for last-minute legislative renewals. If you've been hesitant to adopt a paid leave policy because of expiration concerns, that barrier is now gone.
How to track and document paid leave for credit claims
Proper documentation is essential for claiming the credit and surviving an audit. Incomplete records can result in denied claims, even if you have a qualifying policy in place.
Required documentation for audits
Keep these records organized and accessible for at least 3 years:
- Written leave policy: A dated copy showing compliance with IRS requirements, including non-interference provisions
- Employee eligibility records: Proof of tenure (at least 1 year of service) and prior-year wage threshold compliance
- Leave requests and approvals: Documentation of the specific FMLA-qualifying reason for each leave period
- Payroll records: Detailed records of wages paid during leave periods, including the wage replacement percentage
- Time tracking: Hours and dates of leave taken for each qualifying employee
Common tracking mistakes to avoid
- Mixing PTO with FMLA leave: Keep qualifying leave separate from general time off in your tracking system. If you can't distinguish FMLA leave from vacation days, you'll struggle to support your credit claim.
- Missing policy signatures: Make sure employees acknowledge the written policy. An unsigned policy creates doubt about whether employees were aware of their benefits.
- Incomplete reason codes: Always document the specific FMLA-qualifying purpose for each leave request. A generic "personal leave" entry won't hold up in an audit.
Use Ramp's accounting automation to maximize your tax savings
Effectively managing your business's finances and staying on top of tax planning can be complex, but it's crucial for ensuring you get the most value from tax-saving opportunities such as IRC 45S. By using the right accounting tools, you can streamline your accounting processes, track payroll, and ensure your business qualifies for appropriate tax credits.
Ramp's accounting automation software simplifies financial management, helping you maintain accurate records, stay compliant with IRS regulations, and maximize your tax savings. With features that automate key financial tasks and provide real-time insights, Ramp empowers your team to make smarter financial decisions and reduce manual work.
Explore an interactive demo to see how Ramp can help you manage finances more efficiently and unlock tax savings.
FAQs
Yes, you can generally file amended returns to claim the credit for prior tax years, subject to the standard statute of limitations for filing claims (typically 3 years from the original filing date). If you had a qualifying policy in place but didn't claim the credit, it's worth reviewing past returns with your tax advisor.
Yes, part-time employees can qualify if they meet the 1-year tenure and wage threshold requirements. However, the paid leave benefit must be prorated based on their normal work schedule. For example, an employee who normally works 20 hours per week would receive a proportional leave benefit compared to a full-time employee.
Payments for leave that are mandated by state or local law don't qualify for the federal credit. Only employer-funded leave provided above and beyond these legal requirements is eligible. If your state requires 4 weeks of paid leave and you offer 6, only the two additional weeks count toward the IRC 45S credit.
The common law employer—not the Professional Employer Organization (PEO)—is typically the entity eligible to claim the credit. You bear the ultimate responsibility for the wage payments, so the credit flows to you even if a PEO handles payroll administration. Confirm this with your PEO and tax advisor to ensure proper documentation.
Yes, employees receive their paid leave wages exactly as specified in your policy. The tax credit is a reimbursement to you for providing those wages—it doesn't reduce employee pay in any way. Your employees won't see any difference in their paychecks because you claimed the credit.
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