Unlocking Employer Benefits - The Section 45S Credit for Paid Family and Medical Leave

In a world where work-life balance is becoming an essential part of employee satisfaction, Section 45S of the Internal Revenue Code offers a win-win opportunity for employers and employees alike. Introduced in 2017, this federal provision rewards employers who support their workforce with paid family and medical leave by offering a substantial tax credit. However, taking full advantage of this credit requires careful planning, understanding, and compliance. Here's everything you need to know about this groundbreaking incentive.

What is Section 45S?

Section 45S provides a general business tax credit for employers who offer paid family and medical leave to their qualifying employees. The credit applies to wages paid for such leave during taxable years starting after December 31, 2017, and will remain available until December 31, 2025, barring extensions by Congress.

The credit ranges from 12.5% to 25% of wages paid, depending on how much of the employee's regular salary is covered during their leave. To qualify, employers must meet specific eligibility criteria.

Key Eligibility Criteria

Employers must establish a written leave policy providing at least two weeks of paid leave annually for full-time qualifying employees, prorated for part-time staff, with pay equal to at least 50% of regular wages.

Qualifying employees are those who have worked for the employer for at least one year and earned $72,000 or less in the prior year (2018 threshold, adjusted annually for inflation). The policy must also include explicit non-interference protections to safeguard employee rights and prevent discrimination.

What Counts as Family and Medical Leave?

Paid leave must be explicitly designated for Family and Medical Leave Act (FMLA) aligned purposes, such as the birth or adoption of a child, caring for a spouse, child, or parent with a serious health condition, addressing the employee's own serious health condition, or managing qualifying exigencies related to a family member's active military duty. Leave for other purposes, such as vacation, sick, or personal time, does not qualify, nor does leave mandated or funded by state or local governments under Section 45S.

How is the Credit Calculated?

The credit begins at 12.5% of wages paid during family and medical leave and increases by 0.25% for every percentage point above 50% of regular wages provided. For instance, an employer paying 60% of regular wages qualifies for a 15% credit, while those offering 100% can claim the maximum 25%. This credit applies to up to 12 weeks of leave per employee annually, providing a strong financial incentive to implement or expand paid leave policies.

Maximizing the Benefits

To maximize this credit, employers must establish a written policy before leave is taken (with transitional rules for initial years), align with FMLA definitions and protections even if not directly covered by the FMLA, and ensure precise tracking of wages, leave purposes, and policy execution. Short-term disability payments may also qualify under Section 45S, providing added flexibility.

A Strategic Opportunity for Employers

The Section 45S credit is more than just a tax break; it reflects a broader commitment to employee well-being and family support. Employers who embrace this initiative can not only reduce their tax liability but also foster a workplace culture that values work-life balance.

As 2026 approaches, businesses should seize this opportunity to review their leave policies, align with Section 45S requirements, and reap the financial and cultural rewards of being a family friendly employer.

Stay tuned for updates on federal initiatives and tax credits that support employers and employees alike!