The new Tax Relief for American Families and Workers Act of 2025 didn’t just change deductions for families—it also brought back a valuable employer benefit. The Paid Family and Medical Leave Credit (FMLA credit) is once again available, giving businesses the chance to reduce their tax bill while supporting employees.

But there’s a twist. The rules have been updated, and they’re more favorable for small business owners who want to provide competitive benefits. Here’s what you need to know.

Want the big picture first? Watch our YouTube breakdown of the 2025 tax bill where Misty and Tanya explain the changes in plain language.

What Is the Paid Family Leave Credit?

The credit was designed to encourage businesses to offer paid family and medical leave. In exchange, employers can claim a percentage of those wages as a direct tax credit (reducing taxes dollar-for-dollar).

For background on how payroll taxes work alongside credits, check out our guide: Breaking Down Payroll Taxes: Who Has to Pay?.

What’s New in 2025?

Here’s where the “twist” comes in:

• Insurance Premiums Now Count: Employers can include both wages paid during leave *and employer-paid health insurance premiums when calculating the credit.

• Extended Eligibility: Clarified that small businesses qualify if they meet requirements.

• More Value: While the base credit percentages remain, adding premiums means bigger potential savings.

Who Can Claim It?

To qualify, businesses must:

1. Have a Written Policy — at least 2 weeks of paid family/medical leave annually for full-time employees (pro-rated for part-timers).

2. Pay at Least 50% of Wages — during leave, employees must receive at least half their regular pay.

3. Cover Eligible Employees — employees must have worked at the business for at least a year and earn below an IRS-set income cap.

How Much Is the Credit Worth?

The credit starts at 12.5% of wages if employees receive 50% of pay during leave. It increases by 0.25% for every percentage point above 50%, up to 25% of wages and premiums.

Example:

If you pay an employee $1,000 for family leave at 60% of their normal pay plus $100 in health premiums, your business could claim about 15% ($165) as a credit.

For small business owners already watching every deduction, this is one more way to cut taxes. Need more ideas? See our blog: Are You Missing These 10 Small Business Tax Deductions?.

Why This Matters for Small Businesses

Beyond tax savings, offering paid family leave:

• Builds Employee Loyalty — retention improves when benefits are offered.

• Helps Recruitment — job seekers weigh benefits heavily.

• Strengthens Small Business Competitiveness — as we discussed in Small Businesses Drive Growth: Why They’re More Than Just a Niche Market.

Action Steps for Employers

1. Update Your Written Policies to formally include paid family/medical leave.

2. Work With Payroll to separately track wages and premiums during leave.

3. Keep Records Organized — the IRS requires documentation.

4. Confirm Eligibility With Your CPA before claiming the credit.

For the official IRS breakdown, visit: Employer Credit for Paid Family and Medical Leave.

Final Thoughts

The Paid Family Leave Credit is back, and this time it’s more generous. By including insurance premiums, small businesses can turn a thoughtful employee benefit into real tax savings.

Want to know if your business qualifies? Schedule a strategy session with our team, and we’ll help you maximize the Paid Family Leave Credit in 2025.