Employer Credit for Paid Family and Medical Leave (Section 45S)
The Employer Credit for Paid Family and Medical Leave, often called Section 45S, provides tax savings to employers who offer qualifying employees paid leave for family and medical needs. It's designed to encourage businesses to support their workforce during critical times.
This credit helps to reduce tax liability, or taxes you owe, by covering a percentage of the wages paid to qualifying employees while they're on family or medical leave. It supports well-being, improves retention, and strengthens your business resilience.
Why This Credit Matters to Your Business
Tax Savings
Employers can claim a tax credit of 12.5% to 25% of wages paid to qualifying employees on leave, depending on how much regular wages are covered, for up to 12 weeks per taxable year. See an example at the end of this guide.Recruitment and Retention
Paid leave supports employees during life events and increases an employee's loyalty to their employer.Flexible Implementation
Employers who are not covered under the Family and Medical Leave Act (FMLA) can still qualify if they provide qualifying leave.Culture and Morale
Offering paid leave shows a commitment to employee health and family needs.
Who Qualifies
For Employers
To claim the credit, the employer must have a written policy that:
Provides at least two weeks of paid family and medical leave to full-time qualifying employees (prorated for part-time);
Pays at least 50% of the employee’s regular wages during the leave; and
The policy must be available to all qualifying employees.
Important Notes
Sole Proprietors cannot claim this credit for their own leave, since Section 45S only applies to employees, and business owners are not considered employees of their own sole proprietorship.
Nonprofits typically cannot claim this credit since most do not pay federal income tax. However, if a nonprofit operates through a taxable subsidiary (such as an LLC or C-Corp), the subsidiary may be eligible to claim the credit if it meets all other requirements.
For Employees
An employee must:
Be covered under the Fair Labor Standards Act (FLSA);
The FLSA sets standards for minimum wage, overtime pay, recordkeeping, and youth employment for workers in the private sector as well as in federal, state, and local government.
Have worked for the employer for at least one year;
Have earned no more than a certain amount, as defined under the IRS’s highly compensated employee (HCE) threshold.
Receive prorated benefits if they’re part-time (under 30 hours per week).
What Counts as Qualified Leave
To qualify, leave must be for family or medical needs, specifically one or more of the six reasons outlined under the Family and Medical Leave Act (FMLA), even if the employer is not formally covered by FMLA. These qualifying reasons include:
Birth and bonding - Birth of the employee’s child and caring for the newborn
Adoption/foster care - Placement of a child with the employee for adoption or foster care
Family caregiving - Caring for an employee’s spouse, child, or parent with a serious health condition
Own serious health condition - Employee’s serious health condition that prevents performing job functions
Military family leave - Qualifying exigencies due to a spouse, child, or parent on active military duty
Military caregiver leave - Caring for a service member who is the employee’s spouse, child, parent, or next of kin
Important note: General paid vacation, personal leave, or sick leave does not qualify as family and medical leave under Section 45S - the leave must be specifically designated for one of the FMLA purposes only.
Common Myths About the 45S Credit
Myth: Only FMLA-covered employers qualify.
Reality: Any employer that provides paid leave specifically for one or more of the six reasons outlined under the Family and Medical Leave Act can claim the credit if they are not subject to FMLA.
Myth: Only full-time employees are eligible.
Reality: Part-time employees can also qualify for leave, which can be prorated.
Myth: Employers must offer leave for all FMLA purposes.
Reality: Employers do not need to offer all types of FMLA leave. If the paid leave is covering one or more qualifying purposes, employers can still claim the credit.
Myth: The credit is hard to calculate.
Reality: The credit starts at 12.5% and increases by 0.25% for each additional 1% of wage replacement above 50%. The maximum credit is 25% if 100% of wages are covered during the leave.
How to Claim the Credit in Three Steps:
Have a Written Leave Policy
Your business must have a written policy that provides at least two weeks of annual paid family and medical leave to full-time qualifying employees (prorated for part-time) and pays at least 50% of the employee’s regular wages during leave. This policy must be established and in effect before the leave is taken.
Track Qualified Leave and Wages
Maintain accurate records of when leave was taken, wages paid, and which employees qualified based on IRS rules.
Complete IRS Form 8994 and IRS Form 3800
File the required tax forms (IRS Form 8994 and IRS Form 3800) or work with your tax preparer to claim the credit.
Frequently Asked Questions:
Can small businesses claim this credit?
Yes. There is no minimum business size requirement. Even employers not subject to the Family and Medical Leave Act (FMLA) can qualify if their policy meets Section 45S requirements. The policy has to provide at least two weeks of annual paid family and medical leave to full-time qualifying employees (adjusted proportionally for part-time) and pay at least 50% of the employee’s regular wages during the leave.
Does the leave have to be job-protected, like under FMLA?
No. Job protection (guarantee you will get your same job back after leave) is not required to qualify for the credit. However, for employees not covered by FMLA, employers must include "non-interference" language in their written policy.
This non-interference language ensures that employees understand their employer cannot attempt to stop them from exercising their rights under the written policy, punish them for using their rights, or fire them for speaking up about policy violations.
Can I offer leave for only some FMLA reasons?
Yes. You can design your policy to cover one or more of the family or medical needs. For example, you could offer leave only for birth/bonding or only for serious health conditions.. For example, you could offer leave only for birth/bonding or only for serious health conditions.
Is there a maximum amount of tax credit an employer can claim through Section 45S?
There is no overall dollar limit, but several restrictions apply: the credit cannot exceed 25% of wages paid, cannot exceed 12 weeks per employee per year, and only applies to employees who earned below a specific income limit each year. This limit is set at 60% of the minimum income level used by the IRS to define a highly compensated employee.
The IRS defines a highly compensated employee as someone who owns a certain amount of the business or is paid above a certain amount.
For this hypothetical example, if the minimum income to be considered a highly compensated employee in a plan year was $100,000, employees eligible for the 45S credit would have to have earned $60,000 or less (60% of $100,000). The actual amount varies by year, so check the IRS website for current information: here.
What types of businesses are eligible for the credit?
Generally, for-profit businesses are eligible for the credit. Section 45S is a business tax credit that reduces federal income tax liability or reduces the amount of federal income tax a business owes. For example, since 501(c)(3) nonprofits don't pay federal income tax, they are not eligible for this credit.
Where to Learn More
Highly Compensated Employee Resources:
Example:
José has an employee named Shaun who normally earns $1,000 per week. When Shaun takes 8 weeks of qualifying FMLA leave, here's how the Section 45S credit applies:
Shaun's normal wages for 8 weeks: $1,000 × 8 weeks = $8,000
José pays Shaun the minimum of 50% during leave: $8,000 × 50% = $4,000
José’s tax credit: $4,000 × 12.5% = $500
This allows José to reduce his business tax liability by $500 for providing paid family and medical leave to Shaun, effectively reducing the cost of the $4,000 in leave wages by $500.