~ Author – Eric M. Arbore, CPA, Tax Supervisor ~
Employers who provide paid family and medical leave may have a new opportunity to benefit from a federal tax credit beginning in 2026.
The employer credit for paid family and medical leave, under Internal Revenue Code Section 45S, was originally created as a temporary credit. Recent legislation, commonly referred to as the One Big Beautiful Bill Act, made the credit permanent and expanded the rules for tax years beginning after December 31, 2025. The IRS has also issued Notice 2026-28 providing guidance on the updated rules.
What is the Credit?
The paid family and medical leave credit is available to eligible employers that provide qualifying paid leave to qualifying employees. The credit is claimed on Form 8994.
Qualifying leave generally includes leave for certain family and medical reasons, such as the birth or care of a child, adoption or foster placement, serious health conditions and certain military family leave situations.
The credit generally ranges from 12.5% to 25% of qualifying paid leave amounts, depending on the percentage of regular wages paid to the employee while on leave. The credit generally applies to up to 12 weeks of qualifying paid family and medical leave per employee per year.
Key 2026 Changes
The Credit Is Permanent
The credit is no longer temporary. This allows employers to consider the credit as part of their long-term employee benefits and tax planning.
Insurance Premiums May Qualify
Beginning in 2026, employers may calculate the credit based on either wages paid to employees on qualifying leave or certain premiums paid for insurance policies that provide paid family and medical leave benefits.
This change may benefit employers that provide paid leave through an insurance policy depending upon the situation.
Employees May Qualify Sooner
Employers may elect to treat employees as qualifying employees after at least six months of employment, rather than requiring one year of employment.
Some Part-Time Employees May Be Included
The updated rules allow certain part-time employees to be included if they are employed for at least 20 hours per week.
State or Local Required Leave Has Special Rules
Paid leave required by state or local law may help an employer meet the eligibility requirements. However, leave required by state or local law, or paid by a state or local government, generally cannot be used to calculate the credit amount.
Related Employers Should Review the Aggregation Rules
Businesses under common ownership may need to analyze eligibility on a controlled-group basis.
What Should Employers Do?
Employers should review their paid leave policies and insurance arrangements to determine whether they may qualify for the expanded credit. Important items to review include:
- whether the employer has a written paid family and medical leave policy;
- whether the leave qualifies under Section 45S;
- whether the policy pays at least 50% of the employee’s regular wages;
- whether employees meet the service, hours and compensation requirements;
- whether insurance premiums fund qualifying paid leave benefits; and
- whether related entities must be analyzed together.
Employers with paid leave insurance coverage should consider asking their insurance carrier or broker for information on what portion of the premium relates to qualifying paid family and medical leave benefits.
Final Thoughts
The 2026 changes may make the paid family and medical leave credit more valuable and easier for certain employers to use. However, the credit still includes detailed requirements, including written policy rules, employee eligibility limits, documentation requirements and special rules for insurance premiums.
If your business provides paid family or medical leave, or maintains insurance coverage for paid leave benefits, please contact our office to discuss whether the expanded credit may apply to your business.