• – 1993: The Family and Medical Leave Act (FMLA) created a national baseline of job-protected, unpaid leave—generally up to 12 weeks—for certain family and medical reasons. It guaranteed time off, but no paycheck. DOL+1

• – 2004 onward (states lead): States began building paid leave programs (first up: California in 2004), typically financed like social insurance. These showed employers and workers that paid leave could work at scale. Congress.govEmployment Development Department
  

2017–2025: A temporary federal tax credit (the first try)

• – 2017 (TCJA): Congress added §45S—a temporary general business credit for employers who voluntarily pay employees during FMLA-type leave. The credit rate ranges from 12.5%–25% depending on the wage-replacement rate (starts at 12.5% when you pay 50% of normal wages; rises 0.25 points per point above 50%, capped at 25%). The IRS issued guidance in Notice 2018-71 and FAQs. IRS+1Lexology

• – Extensions: Congress extended §45S through 2020 (P.L. 116-94) and then through 2025 (P.L. 116-260). So, under pre-2025 law, it applied to wages in tax years after 2017 and before 2026. Congress.govIRS

• – Reality check: Uptake was limited—only 12,700 employers claimed the credit in 2021—partly because it kept sunsetting and because some rules were hard for smaller firms to meet. The Washington Post

2025: Congress makes §45S stronger and permanent

In July 2025, Congress enacted the One Big Beautiful Bill Act (Public Law 119-21). Section 70304 (“Extension and enhancement of paid family and medical leave credit”) did four big things, effective for tax years beginning after Dec. 31, 2025 (so, starting with 2026 calendar-year returns): Congress.govLegal Information Institute

1. Made §45S permanent by striking the old sunset. Legal Information Institute
2. Added a second way to claim the credit:
   • – Wage method (original): applicable percentage × wages you pay during leave.
   • – New premium method: applicable percentage × premiums you pay for a paid-leave insurance policy in force that year. For the premium method, the policy’s stated replacement rate is used to set the percentage—even if no one actually takes leave that year. Legal Information Institute
     
3. Updated eligibility details to widen access and clarify compliance:
   • – You may elect a 6-month service threshold (instead of 1 year).
   • – Employees must be customarily ≥20 hours/week.
   • – Compensation limits are measured on an annualized basis (pro-rated for part-time). Legal Information Institute
     
4. Coordinated with state programs & aggregation rules:
   • – State-paid/mandated benefits can help you meet minimum benefit levels but don’t count toward the federal credit amount.
   • – Controlled-group members are generally treated as one employer, with a narrow exception that requires a “substantial and legitimate business reason.” Legal Information Institute
     
5. No double-dipping (Section 280C): If you claim the wage credit, you reduce your wage deduction by the credit; if you claim the premium credit, you can’t deduct the portion of premiums equal to the credit—ensuring a single tax benefit. Legal Information Institute

(You can see these changes in the Code text itself at LII, including the new premium option, the hours rule, the 6-month election, state-benefit coordination, and the 2026 effective date notes.) Legal Information Institute

Why the 2025 redesign is smart policy for responsible employers

1) It replaces uncertainty with stability.
A permanent credit lets HR and finance teams build paid-leave into their multi-year plans and budgets—no more “will Congress extend it?” whiplash that discourages investment in better benefits. Stability tends to boost adoption. Legal Information Institute

2) It offers two paths—so more businesses can say “yes.”

• – If you already pay directly during leave, the wage method fits.
• – If you prefer to manage risk and cash flow, the premium method lets you buy a short-term disability/paid-leave policy and still receive the credit based on the policy’s replacement rate—even in a low-utilization year. That predictability is especially helpful for small and mid-size employers. The Washington Post
  

3) It aligns federal incentives with the real world of state programs.
The law clarifies how state-paid or mandated benefits interact with the federal credit: states can help you meet the minimums, but the credit rewards the dollars you put in (or your premiums). That avoids overlap while encouraging employer participation on top of state baselines. Legal Information Institute

4) It broadens access while keeping a clear floor.
Letting employers choose 6 months of service (rather than 1 year) and recognizing part-time work (≥20 hours/week) brings more employees into paid-leave coverage—especially those in retail, hospitality, and care—without mandating a one-size-fits-all plan. Legal Information Institute

5) It’s a “carrot,” not a mandate—and that’s workable.
Many employers want to act responsibly but need a nudge that respects their budget cycle. A general business credit that scales with generosity (12.5%–25%, keyed to your replacement rate) does exactly that. It rewards better plans with a bigger offset, while leaving design choices to employers. Legal Information Institute6) It supports retention, equity, and competitiveness.
Research from early state programs linked paid leave to improved labor-force attachment and family well-being—benefits employers feel through lower turnover and higher morale. Encouraging more firms to adopt paid leave moves those gains beyond the handful of states that already finance it. PMC

What it means on the ground (quick, practical view)

• – You can build or buy: Pay employees during leave or buy a policy; either way, there’s a federal incentive (with the §280C deduction adjustment). Legal Information Institute
• – Write it down: You still need a written policy offering at least two weeks at ≥50% pay, with aggregation and non-interference commitments—now clarified in the statute. Legal Information Institute
• – Coordinate with states: State benefits help meet minimums but don’t increase your credit base. Legal Information Institute
• – Timeline: The new rules apply for tax years beginning after Dec. 31, 2025 (first seen on 2026 returns). Until then, the pre-2025 rules apply for any remaining 2025 fiscal years. Legal Information InstituteIRS

The bottom line

By making §45S permanent, adding a premium-based route, widening eligibility, and clarifying state coordination, Congress turned an underused pilot into a durable, flexible incentive. It doesn’t force a one-size-fits-all mandate; it rewards employers who step up—especially smaller firms that want to do right by their people without betting the company. From a policy perspective, that’s a win: more families get paid time to care and heal, and employers get a fiscally responsible, scalable way to provide it. Legal Information InstituteThe Washington Post

We welcome your feedback, questions and ideas — comment below or email us at info@ifindtaxpro.com.

Interested in crypto accounting? Try Minutes Crypto — Digital-Asset Ledger & Tax Suite to streamline your workflow → minutescrypto.com