Can an S corporation or partnership claim the paid family and medical leave credit?

An S corporation client offers six weeks of paid parental leave at full pay, and the owner has heard the federal paid leave credit is now permanent. The question that follows is whether a pass-through entity can even use it, since the S corporation itself doesn’t pay federal income tax.

It can qualify, and the credit does get used, just not by the entity. Under IRC §45S, the S corporation or partnership is the one that has to meet the requirements. It needs a written policy, in place before the leave starts, that gives every qualifying full-time employee at least two weeks of paid family and medical leave a year (proportionately less for qualifying part-time employees) at 50% or more of normal pay. The leave has to be for FMLA-type reasons: bonding with a new child, the employee’s own serious health condition, or caring for a spouse, child, or parent with one, plus certain military-related leave. Ordinary vacation or general PTO doesn’t count. If the business is small enough that federal FMLA doesn’t apply to it, the policy also has to include the noninterference and nondiscrimination language the statute requires. The entity calculates the credit on Form 8994, separately states each owner’s share on Schedule K-1, and the owner claims it on their own Form 1040 through Form 3800.

Two things surprise people once the credit lands on the personal return.

First, the net tax benefit is smaller than the credit. The credit runs from 12.5% to 25% of leave wages depending on how much pay is replaced, but the business must reduce its wage deduction by the same amount, and it must do so even in a year when the owner can’t use the whole credit. Consider a wholly owned S corporation paying $20,000 of qualifying leave wages at full pay. The credit is $5,000, but only $15,000 of the wages remain deductible, so $5,000 more income flows through to the owner. At an assumed 32% marginal rate that costs $1,600, so the owner comes out about $3,400 ahead of where they would be by simply deducting the full $20,000 and not claiming the credit. That figure assumes the owner uses the whole credit this year and ignores §199A, state taxes, and other interactions.

Second, two owners with identical K-1s can end up with different tax savings. The credit is nonrefundable and subject to the general business credit limits, and an owner who doesn’t materially participate can have it suspended under the passive activity rules. Unused amounts carry forward, but on different timetables depending on which limit applied, and there is no guarantee they are eventually used.

A boundary on what counts: the wage credit covers up to 12 weeks of leave per qualifying employee per year, and leave that state or local law requires (or that a state program pays for) can help the policy qualify but does not generate any credit. An employer in a state with mandated paid leave is only earning credit on what it pays above that.

The owner doesn’t need to take leave personally. The credit comes from leave paid to qualifying employees, who for 2026 need at least a year of service (six months if the employer elects), customarily work 20 or more hours a week, and had 2025 compensation of no more than $96,000 measured on an annualized basis, pro-rated for part-time employees. So someone hired mid-2025 doesn’t qualify just because their partial-year W-2 came in under the number. That limit applies to the employee on leave, not to the owner claiming the credit.

This article describes the wage-based method. Beginning in 2026, qualifying employer-paid PFML insurance premiums can also generate the credit, even in a year when no employee takes leave, which is a separate calculation with its own rules.

Fellow Travelers can review whether an existing parental or medical leave policy already satisfies §45S and set up the payroll tracking needed to support the credit.