The Treasury Department issued new guidance on Aug. 5 expanding the tax credit available to employers who offer paid family and medical leave, making it easier for businesses to provide up to 12 weeks of paid time off to care for newborns, sick family members or their own health conditions.
The credit was originally established under the 2017 tax legislation signed by President Trump. The updated guidance, announced alongside statements from the Treasury Secretary and the IRS chief executive, is intended to access the updated incentive and broaden eligibility.
Treasury Secretary Scott Bessent framed the guidance as a step toward ensuring that workers do not have to choose between earning a paycheck and caring for a family member. He said the updated rules give employers clarity about accessing the incentive while supporting workers, families and businesses simultaneously.
IRS Chief Executive Frank Bisignano said the changes enacted under recent legislation would make more employers eligible for the credit and give them more options for structuring paid time off for their workers.
What the credit covers
The family and medical leave tax credit allows qualifying employers to deduct a portion of the wages they pay to employees who take qualifying absences. Covered uses include recovery from a serious health condition that prevented the employee from working, care for a newly born or adopted child, and care for a family member dealing with a serious illness.
The maximum duration that can qualify is 12 weeks. The deduction rate, which determines what percentage of paid wages the employer can deduct, is set on a sliding scale that rewards employers who offer higher wage replacement rates during the leave period.
By expanding the incentive, the guidance aims to encourage more employers, including smaller businesses that find paid time off prohibitive, to implement or expand such policies. Employer-offered paid time off in the United States has historically been less comprehensive than in most peer economies, and this mechanism is one of the tools available to close that gap without mandating paid time off at the federal level.
The international context
The United States remains an outlier among wealthy economies in not having a federal mandate for paid parental leave. A 2023 study of OECD member countries found that new mothers receive an average of approximately 19 weeks of paid maternity time, with several countries providing full salary replacement.
American workers’ access to paid family and medical leave varies widely depending on their employer, their state of residence and their union status. A handful of states, including California, New York and New Jersey, have their own paid programs funded through small payroll deductions. Federal employees have separate entitlements. But for most private sector workers without such programs, paid time off for family or medical reasons is either unavailable or limited.
This approach represents a market-based incentive structure rather than a mandate. It encourages employers to offer paid time off by reducing the net cost, but it does not require them to do so, and workers at non-participating employers have no access to the incentive.
What comes next
Employers seeking to claim the credit under the updated guidance will need to follow the IRS rules for qualifying programs, which include requirements around policy structure, the duration offered and the wage replacement rate provided. The leave guidance released Aug. 5 is intended to provide the specificity businesses need to set up compliant programs and meet the guidelines accurately.
This incentive applies to wages paid during qualifying absences, and employers should account for these in tax filings in the year the absence was taken. Specific calculations depend on the wage replacement rate offered and the duration of the covered period, making a tax professional or benefits advisor a useful resource for businesses evaluating whether to expand their offerings in response to the updated guidance.
