Are complex paid leave mandates overwhelming your private sector business? Paid Family and Medical Leave (PFML) tax credits could help ease the financial strain of providing paid leave.
As part of the recently enacted One Big Beautiful Bill Act (OBBBA), these credits incentivize businesses to offer wage-replacement benefits to employees during critical life events, like bonding with a new child or caring for a sick family member.
Here’s the bottom line: If you have a written PFML policy that meets federal requirements—and your covered employees meet certain eligibility standards—you could qualify for a tax credit worth between 12.5% and 25% of wages or insurance premiums related to PFML. And if you’re dealing with state-specific rules, such as Delaware’s new PFML requirements, you may be able to claim credits for offering extra coverage beyond what the state mandates.
OBBA Basics
1. Have a Qualifying PFML Policy
To claim this credit, you must have a written PFML policy that:
- Gives full-time employees at least two weeks of leave annually (prorated for part-timers) for one or more leave reasons covered under the federal Family and Medical Leave Act (FMLA)
- Offers at least 50% of employees’ normal wages during leave
- Prohibits interfering with or retaliating against employees for taking or requesting leave
2. Identify Qualifying Employees
The law sets specific employee qualifications for the tax credit. A “qualified employee” must:
- Have worked for you at least six months
- Earn no more than 60% of the Highly Compensated Employee (HCE) threshold
(Note: For 2026, this threshold is $160,000, making the earnings limit $96,000) - Work an average of at least 20 hours per week
3. Decide How to Claim Your Credit
You can claim the tax credit in two ways:
- Based on wages paid to employees on qualifying leave
- Based on premiums paid for an insurance policy that provides qualifying PFML benefits
Covering employee wages while they’re on leave can be difficult for employers, especially from a cash-flow perspective. Some prefer the simplicity of purchasing a PFML insurance policy, allowing them to claim the tax credit without having to track and report employee leave usage.
How the Tax Credit Works:
The tax credit starts at 12.5% when an employer covers (or insures) at least 50% of an employee’s normal wages. For every additional 1% of wage replacement beyond 50%, the credit increases by 0.25%, up to a 25% maximum.
Wage-Based Credit: If you cover 80% of an employee’s normal wages during leave, you’re 30 percentage points above the 50% baseline. So, start with 12.5%, then add 0.25% x 30 = 7.5%, for a total of 20%. For example, paying $10,000 in leave wages? You could claim a $2,000 credit.
Premium-Based Credit: If your qualifying PFML insurance policy provides 80% wage coverage, you can claim a 20% credit on the premiums paid—even if no one takes leave under the policy.
Delaware Paid Leave: A Practical Example
Under federal rules, you cannot claim the credit for paid leave already funded by a state or local program. However, employers who voluntarily extend coverage beyond what’s legally required—or enhance the benefits offered by the state program—may qualify for the federal tax credit. This includes scenarios where employers:
- Offer paid leave for additional qualifying reasons not covered by the state plan
- Provide a higher wage replacement percentage than the state mandates
- Extend coverage to employees who are exempt from the state-paid leave program
Delaware’s state plan typically covers around 80% of an employee’s wages (up to a cap), and the program is tiered by employer size. While employers must comply with these minimum standards, they are free to increase that coverage or extend it to employees who are not otherwise mandated to receive it. In these scenarios, the employer-provided additional coverage may qualify for the PFML tax credit, provided all other federal requirements are met.
Example: Small Employer (Under 10 Employees)
As a small employer with a team of nine, you are exempt from Delaware Paid Leave. However, you opt to provide 12 weeks of PFML anyway, covering at least 50% of wages or purchasing an insurance policy that guarantees the same. Because your PFML plan is voluntary and meets federal requirements, you may qualify for the federal tax credit. This credit could cover up to 25% of wages or premiums paid, depending on your employees’ pay rates.
Example: Mid-Size Employer (10–24 Employees)
Delaware law requires mid-size employers to provide paid parental leave, but you voluntarily add medical, caregiver, and qualifying exigency leave to your PFML plan. That extra coverage is where the federal credit comes into play. While you cannot claim the credit for the parental leave required by Delaware law, you may claim it for the additional leaves (or any top-off you provide above the state-mandated 80% wage replacement rate).
Example: Large Employer (25+ Employees)
As a large employer, you’re required under Delaware law to provide all types of PFML, including parental, medical, caregiver, and qualifying exigency leave. Since this coverage is already mandated by the state, it does not qualify for the federal tax credit. However, if you enhance these benefits—say you pay 100% of wages instead of 80%—you may claim the tax credit on the additional 20%.
Putting it All Together
1. Document Carefully
Maintaining detailed records is crucial. Accurate and organized documentation will not only ensure compliance but also make the process of claiming the federal tax credit smoother. Be sure to keep:
- A written copy of your PFML policy
- Proof of employee eligibility (including compensation and tenure)
- Records of wages or premiums paid
- Clear documentation of leave taken, including dates and payment rates
2. File IRS Form 8894
To claim the federal tax credit, you’ll need to elect it when filing your business tax return and submit IRS Form 8894, titled “Employer Credit for Paid Family and Medical Leave.” Any wages or premiums claimed for PFML cannot also be used for other employment-related tax credits. For additional clarification, refer to the IRS guidance on the Section 45S credit or consult a tax professional.
Final Thoughts
Offering robust benefits isn’t just a financial decision—it’s an investment in your company’s culture, brand, and long-term success. By leveraging tax credits like those available for PFML, you can make supporting your employees a key component of your business strategy without shouldering the entire financial burden.
Before making a final decision, consult a tax professional or legal advisor to confirm eligibility and ensure all documentation requirements are met. With thoughtful planning, PFML can become more than just a compliance measure—it can serve as a cornerstone of how you care for your team, foster loyalty, and drive sustainable growth for your business.
This blog is up to date as of December 2025 and has not been updated for changes in the law, administration, or current events. Content is provided for informational purposes only and should not be considered financial, legal, or tax advice. Consult an attorney or a tax professional regarding your specific situation.
