Under the Family and Medical Leave Act (FMLA), most private-sector employers with 50 or more employees must provide up to 12 weeks of unpaid leave for qualified family or medical reasons. While offering paid family and medical leave has always been optional, many small and midsize employers have historically found it too expensive to implement.
That calculation may be changing. The recently enacted One Big Beautiful Bill Act (OBBBA) has permanently extended, and significantly enhanced, the federal tax credit for paid family and medical leave. If your business currently offers unpaid leave or only provides paid leave informally, now might be the time to consider establishing a formal paid leave program.
How the Paid Family and Medical Leave Credit Works
Originally introduced in 2017 under the Tax Cuts and Jobs Act (TCJA), the credit allows eligible employers to claim 12.5% to 25% of eligible wages paid to qualifying employees for up to 12 weeks of leave.
To qualify for the credit, employers must:
- Establish a written policy granting qualifying full-time employees at least two weeks of paid family and medical leave annually, with a prorated amount for part-time staff.
- Pay employees at least 50% of their regular wages during the leave period.
A qualifying employee is someone who:
- Has worked for the employer for at least one year, and
- Earned no more than 60% of the highly compensated employee threshold in the prior year ($96,000 in 2025, adjusted annually for inflation).
What’s New Under the OBBBA
The OBBBA introduces three key changes to the credit:
- Permanent Extension – The credit, previously set to expire after 2025, is now permanent.
- Insurance Option Starting in 2026 – Employers can choose to claim the credit based on qualifying insurance premiums paid for family and medical leave coverage, rather than wages. The percentage remains 12.5% to 25% of premiums paid.
- You must choose either the wage-based credit or the premium-based credit — not both.
- Premium credit applies regardless of whether any employees actually took leave during the year.
- Claiming the premium-based credit reduces the deductible portion of those premiums for tax purposes.
- Updated Employee Eligibility Rules – Beginning next year:
- Employees must customarily work at least 20 hours per week.
- Employers may reduce the service requirement from one year to six months.
- For part-time employees, annualized compensation determines whether they exceed the 60% threshold.
Why This Matters for Employers
For organizations seeking to improve recruitment and retention, these changes could make paid family and medical leave more financially feasible. The permanent tax incentive, combined with the flexibility to claim credits for insurance premiums, gives employers new ways to offset the cost of offering this sought-after benefit.
If you’re considering implementing or expanding paid leave, our team can help you:
- Evaluate potential tax savings under the OBBBA changes.
- Draft a compliant written leave policy.
- Integrate the benefit into your overall employee compensation strategy.
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