Tax Credit Update: The Permanent Paid Family Leave Credit is Here

As a small business owner, you’re constantly balancing growth with the well-being of your team. Offering competitive benefits, especially paid leave, can be a game-changer in attracting and retaining top talent. That’s why the recent passage of the One Big Beautiful Bill Act (OBBBA) is such exciting news. This landmark legislation, signed into law on July 4, 2025, makes a major change: it permanently extends the federal Paid Family and Medical Leave (PFML) employer tax credit.

Originally set to expire at the end of 2025, this credit now provides long-term certainty and planning power for your business.

What is the Paid Family and Medical Leave Credit?

At its core, this is a general business credit that helps eligible employers offset the costs of providing paid family and medical leave to their employees. It’s designed to incentivize companies like yours to support workers during important life events without shouldering the full cost alone.

The OBBBA introduces several key changes that make this credit even more accessible and beneficial:

Permanent Extension: The most impactful change: the credit is now permanent. You can now build paid leave into your benefits strategy with confidence and consistency.
Flexible Credit Calculation: Employers can now choose between two methods to calculate the credit:
- Wage-Based Method – Based on a percentage of wages paid to qualifying employees while on leave.
- Premium-Based Method – Based on a percentage of premiums you pay for qualifying PFML insurance policies during the taxable year, even if no leave is taken.
Broader Employee Eligibility: The tenure requirement for qualifying employees has been shortened. Previously, employees needed to be with you for at least a year. Now, you can elect a shorter requirement of no less than 6 months.
Treatment of State and Local Mandates: If you operate in a state or locality with mandatory paid leave laws, that leave will count toward meeting the federal employer requirement. However, those amounts cannot be included in the actual credit calculation.

Why Implement a Paid Family Leave Plan?

Beyond the financial credit, offering paid family leave has strong strategic value:

Attract and Retain Talent: In a competitive labor market, strong benefits help you stand out and reduce costly turnover.
Strengthen Company Culture: Demonstrating support for employees’ personal lives fosters a more engaged and loyal workforce.
Minimize Business Disruptions: Supporting planned, structured leave reduces chaos and mitigates the cost of unexpected absences or turnover.

Potential Considerations Before Implementation

While the benefits are clear, it’s also important to consider potential challenges or reasons why a business might hesitate:

Initial Costs: Even with the credit, there are real expenses involved, either in paying wages directly or through insurance premiums. For businesses of all sizes, cash flow may be a concern.
Limited reimbursement: The credit does not cover 100% of your leave-related costs. It’s intended to reduce the cost of offering paid leave, not eliminate it entirely.
No Double Benefit: If you claim the credit based on premiums paid for a qualifying insurance policy, you cannot also deduct the portion of those premiums that equals the credit amount.
Evolving Guidance: While the OBBBA lays out the framework, the IRS and Treasury are expected to issue additional guidance. Some employers may prefer to wait for this clarification before implementing or adjusting their policies.

Ready to Explore Your Options?

The permanent extension and enhancement of the paid family and medical leave credit present an outstanding opportunity. E1 is here to help you understand what’s available now and what’s still evolving.

If you have questions about this credit or any of our other HR and compliance services, give us a call at 281-492-9292, or email us at sales@eosg.com. We’re happy to help you make sense of the new rules and put them to work for your business.