Paid Family and Medical Leave Tax Credit Expanded for 2026
Travis Tandy
August 30, 2026
2026 Business Tax Update
Paid Family and Medical Leave Tax Credit Expanded for 2026: What Employers Need to Know
Updated August 29, 2026
Employers that provide paid family and medical leave may be overlooking a valuable federal business tax credit. Beginning in 2026, Congress has made the employer Paid Family and Medical Leave Tax Credit under Internal Revenue Code Section 45S permanent and expanded several of its rules.
The changes may be especially important for small and midsize employers that already provide paid parental leave, medical leave, short-term disability benefits, or insurance coverage that helps fund an employee's paid leave.
At a glance: Eligible employers may receive a federal general business tax credit generally ranging from 12.5% to 25% of qualifying paid family and medical leave wages. Beginning in 2026, employers may also be able to calculate the credit using certain qualifying Paid Family and Medical Leave insurance premiums.
What Is the Paid Family and Medical Leave Tax Credit?
Section 45S provides a federal general business tax credit to employers that meet certain requirements and provide qualifying paid family and medical leave to eligible employees.
Under the wage-based method, the credit can generally range from 12.5% to 25% of qualifying wages paid while an employee is on family and medical leave. The credit may apply to as much as 12 weeks of qualifying leave per employee per taxable year.
This is an employer tax credit. It is different from the paid family leave benefits that an employee may receive through a state program.
What Types of Leave Can Qualify?
Qualifying family and medical leave generally includes leave for recognized Family and Medical Leave Act purposes, including:
The birth of a child and time to care for the newborn.
The adoption or foster placement of a child.
Caring for a spouse, child, or parent with a serious health condition.
An employee's own serious health condition that prevents the employee from performing their job.
Certain qualifying circumstances involving a spouse, child, or parent who is on covered active duty in the Armed Forces.
Caring for a covered servicemember with a serious injury or illness when the employee is an eligible family member or next of kin.
Ordinary vacation, PTO, personal leave, or general sick leave does not automatically qualify merely because an employee happens to use it during a medical or family-related absence. The employer's written leave policy and the purpose for which the leave is available are important.
Four Major Changes Beginning in 2026
1. The Credit Is Permanent
Section 45S had previously been a temporary tax provision. The Working Families Tax Cuts made the employer Paid Family and Medical Leave Tax Credit permanent.
2. Six-Month Service Election
Employers may elect to treat employees as qualifying employees after six months of employment instead of waiting until the employee has completed one year of service.
3. New 20-Hour Rule
The qualifying employee definition now generally applies to employees who are customarily employed for at least 20 hours per week, subject to the other Section 45S requirements.
4. Insurance Premiums Can Qualify
Employers can now potentially calculate the credit based on qualifying premiums paid or incurred for insurance that provides Paid Family and Medical Leave benefits.
Two Ways Employers Can Calculate the Credit
One of the biggest changes for 2026 is that employers now have two potential methods for calculating the Section 45S credit.
1
Wage-Based Method
The traditional method calculates the credit using qualifying wages actually paid to an eligible employee while the employee is on qualifying family or medical leave.
Generally, the credit begins at 12.5% when the employer provides qualifying leave at 50% of the employee's normal wage rate.
The credit percentage increases as the employer's wage replacement percentage increases, up to a maximum credit percentage of 25%.
2
Premium-Based Method
Beginning in 2026, an employer maintaining an insurance policy that provides qualifying Paid Family and Medical Leave benefits may elect to calculate the credit using qualifying premiums paid or incurred during the year.
This may provide an opportunity for employers that purchase qualifying paid-leave or disability coverage even when relatively few employees actually take leave during the year.
Not every dollar of an insurance premium will necessarily qualify. Premiums covering nonqualifying employees, nonqualifying leave, or state-mandated benefits may have to be excluded or allocated.
Can an Employer Use Both Methods?
Potentially, yes.
IRS Notice 2026-28 provides that an employer may use the wage method for certain leave and the premium method for other leave, provided the employer does not claim both credits for the same benefit or the same portion of an instance of leave.
For example, if insurance funds part of an employee's leave and the employer pays another portion directly from its general assets, the employer may potentially use the premium method for the insured portion and the wage method for the separately employer-funded portion, assuming all other requirements are met.
How Does the Wage-Based Percentage Work?
Under the wage method, the minimum credit percentage is generally 12.5% when an employer provides qualifying leave equal to 50% of the employee's normal wages.
The percentage increases by 0.25 percentage points for each percentage point that the employer's wage replacement exceeds 50%, up to a maximum credit percentage of 25%.
Simple Example
Assume an eligible employee normally earns $1,000 per week.
During qualifying family leave, the employer pays the employee $600 per week, or 60% of normal wages.
Because the employer is paying 10 percentage points more than the 50% minimum:
12.5% base credit + 2.5 percentage points = 15% credit rate.
If the employer pays $3,600 of qualifying wages over six weeks:
$3,600 × 15% = $540 potential federal tax credit
This simplified example assumes the employee, employer, written policy, wages, and leave all otherwise satisfy Section 45S.
State and Local Paid Leave Rules Now Matter Differently
Another significant 2026 change involves paid leave required by state or local law or paid through a state or local government program.
Employers may now count certain state- or locally mandated leave when determining whether the employer provides enough Paid Family and Medical Leave to satisfy the federal credit's eligibility requirements.
However, the employer generally cannot include the state- or locally mandated leave itself when calculating the federal tax credit.
California Employers: An Important Distinction
California employers should not confuse California Paid Family Leave or State Disability Insurance benefits with the federal Section 45S employer tax credit.
State-required or state-funded benefits may now help an employer satisfy certain federal eligibility requirements, but the amounts attributable to leave required by state or local law generally are not included in the Section 45S credit calculation.
Employers that supplement California benefits with their own qualifying paid leave or maintain separate qualifying insurance coverage should review how the federal credit applies to the employer-funded portion.
What About Insurance Policies Covering Multiple Benefits?
Employers may have an insurance policy that combines qualifying Paid Family and Medical Leave coverage with other benefits, employees, or types of leave that do not qualify for the federal credit.
IRS Notice 2026-28 refers to these as blended premiums.
Employers using the premium method must allocate a blended premium between qualifying and nonqualifying coverage.
The IRS currently allows employers to use a reasonable allocation method that:
Is consistent with the terms of the insurance policy.
Uses objective criteria.
Is supported by contemporaneous records.
Is applied consistently for the taxable year.
Documentation will therefore be particularly important for employers planning to use the premium-based method.
Employers Still Need a Qualifying Leave Policy
The expansion of the credit does not mean every employer paying an employee during an absence automatically qualifies.
Section 45S includes specific requirements regarding an employer's Paid Family and Medical Leave program. Historically, these rules have included a qualifying written policy, minimum leave availability, wage-replacement requirements, and rules governing employees who are not covered by the federal FMLA.
Employers should review their written policy under the updated 2026 rules rather than assuming an ordinary PTO, vacation, sick leave, or short-term disability program qualifies.
Important: Treasury and the IRS have announced that additional proposed regulations are forthcoming. Employers implementing or modifying leave policies should coordinate the tax rules with applicable employment, wage-and-hour, benefits, and state leave laws.
What Should Employers Do Now?
2026 Employer Review Checklist
Review your current written Paid Family and Medical Leave policy.
Identify employees who customarily work at least 20 hours per week.
Determine whether using the new six-month service election could expand your qualifying employee population.
Identify employer-paid parental, family, medical, and disability leave benefits.
Review short-term disability and other insurance policies that may provide qualifying PFML coverage.
Separate state- or locally mandated leave from additional employer-funded benefits.
Track wages paid while employees are actually on qualifying leave.
Obtain annual premium information from insurers and benefit providers.
Determine whether any insurance premium must be allocated between qualifying and nonqualifying coverage.
Compare the wage-based and premium-based methods before filing the business tax return.
Retain documentation supporting eligibility and the calculation of the credit.
How Is the Credit Claimed?
The Paid Family and Medical Leave Tax Credit is part of the federal general business credit under Internal Revenue Code Section 38.
Employers have historically calculated the credit using Form 8994, Employer Credit for Paid Family and Medical Leave, with the credit ultimately incorporated into the general business credit rules.
Because the credit was substantially revised for 2026, employers should use the final 2026 IRS forms and instructions when preparing their 2026 tax returns.
The Bottom Line
Making the Section 45S credit permanent transforms it from a temporary tax provision into a benefit employers can consider when designing their long-term compensation and employee-benefit strategies.
The addition of the premium-based method may also make the credit relevant to businesses that previously ignored it because few employees actually took paid family or medical leave during a particular year.
For employers already paying for parental leave, medical leave, short-term disability coverage, or other employee leave benefits, reviewing Section 45S should become part of the annual business tax planning process.
Could Your Business Qualify?
Tandy Consulting can help business owners review employer-paid leave benefits, payroll records, insurance premiums, and available federal business tax credits as part of the tax planning process.
IRS Resources
IRS Tax Tip 2026-64 – Enhancements to the Paid Family and Medical Leave Tax Credit
Section 45S Employer Credit for Paid Family and Medical Leave FAQs
IRS Form 8994 – Employer Credit for Paid Family and Medical Leave
Disclaimer: This article is provided by Tandy Consulting Inc. for general educational and informational purposes only. It is not intended to constitute tax, legal, employment, payroll, financial, or investment advice and does not create a professional engagement. Eligibility for tax credits depends on the specific facts and circumstances of each employer. Federal, state, and local laws and administrative guidance may change. Employers should consult their tax professional and, when appropriate, qualified employment or benefits counsel before implementing or modifying a Paid Family and Medical Leave program.