The Paid Family & Medical Leave Credit
If you keep paying employees while they're out on family or medical leave - a new baby, a serious illness, caring for a parent - the government gives you back a slice of those wages. It was made permanent and expanded for 2026, and it's finally simple enough to actually use.
In a nutshell
- Worth 12.5% to 25% of the wages you pay during leave - the more of normal pay you cover, the higher the rate.
- Made permanent and expanded for 2026 (OBBBA). It now works even in states with mandated PFML - for the leave you fund above the state minimum.
- You need a written policy that pays at least 50% of wages for at least two weeks of leave.
- Qualifying employee: employed ≥ 1 year (you may elect 6 months for 2026+) with prior-year pay ≤ $96,000.
- Up to 12 weeks per employee per year. New for 2026: you can compute it on insurance premiums instead of wages.
- Claimed on IRS Form 8994, flowing into the General Business Credit (Form 3800).
How the math works
Worked example
An employee who normally earns $800/week takes 8 weeks of parental leave, and you pay 60% of their wages while they're out.
- • Wages paid during leave: 60% × (8 × $800) = $3,840
- • Applicable rate at a 60% payment rate: 12.5% + 0.25×10 = 15%
- • Credit: 15% × $3,840 = $576
Pay 100% of wages instead and the rate climbs to the full 25%.
What P.A.I.D. needs - no connection required
There's no payroll integration to set up for this one. You enter two numbers you already know - the total wages you paid during leave, and what percentage of normal pay that was - and we compute the credit and fill out Form 8994. Keep your written leave policy on file; your CPA confirms it before filing.
Do you qualify? The real limits
The bright-line tests and the things that quietly disqualify a business (2026 tax year).
What can disqualify you
- Vacation, personal, sick, or other PTO is NOT family/medical leave - only FMLA-purpose leave counts.
- Leave paid or mandated by a state or local government doesn't count (only voluntary employer-funded leave above the mandate).
- Paying less than 50% of normal wages during leave disqualifies that leave entirely.
Common reasons businesses get denied
- No written PFML policy in force before the leave was taken.
- Counting regular PTO or vacation as family/medical leave.
- Employees who fail the tenure or the $96,000 prior-year-comp test.
- Claiming leave that the state already requires you to pay.
- Not reducing the wage deduction by the credit (§280C).
Even if you qualify
- Nonrefundable (General Business Credit liability limit; unused carries back 1 / forward 20).
- The wage deduction is reduced by the credit amount (§280C).
Check your state
State figures as of June 2026; many are indexed and change mid-year. Confirm with your state labor department and CPA.
Limits that apply to every federal credit
- They're nonrefundable
- Every credit here offsets income tax but can't create a refund (§38 liability limit). A business with little or no tax liability gets little benefit this year - unused amounts carry back 1 year and forward up to 20 (§39).
- Related businesses are combined
- If you own multiple businesses under >50% common control, the IRS treats them as ONE employer for the size tests (§52/§414). Several small entities can together blow past the under-25-FTE, 30-employee, or 100-employee ceilings even though each looks small alone.
- No double-dipping
- The deduction for the wages/premiums/expenses behind a credit is reduced by the credit amount (§280C), and the same dollar can't fund two different credits.
- Pass-through & passive limits
- For S-corps and partnerships the credit flows to owners on a K-1, where each owner's liability and passive-activity limits (§469) decide how much they can actually use.
Plain-English summary, not tax advice. Your CPA confirms eligibility for your specific business.
Want to know what this is worth for your business?
Answer a few quick questions and we'll estimate which credits you could claim - no pressure, no commitment.