Employers that provide paid family and medical leave (PFML) may now have greater opportunities to benefit from the Section 45S paid family and medical leave tax credit. The One Big Beautiful Bill Act (OBBBA) made the credit permanent and expanded eligibility beginning in 2026, potentially allowing more businesses to qualify.
To help employers understand the changes, the IRS recently issued Notice 2026-28, which provides guidance on the expanded credit. Employers that offer PFML should review the new rules to determine whether they qualify and how to maximize available tax benefits. Businesses that do not currently provide PFML may find that the expanded credit makes offering paid leave more financially feasible.
Key Takeaways
- The Section 45S paid family and medical leave tax credit is now permanent under the OBBBA.
- Beginning in 2026, employers can calculate the credit using either PFML wages paid or eligible insurance premiums.
- The law expands eligibility and provides new flexibility in how employers claim the credit.
- IRS Notice 2026-28 outlines rules for the new premium-based calculation method.
- Employers can rely on the guidance for tax years beginning after 2025 until proposed regulations are issued.
What Is the Section 45S Paid Family and Medical Leave Tax Credit?
The Section 45S PFML tax credit was originally established by the Tax Cuts and Jobs Act (TCJA). It allows eligible employers to claim a general business tax credit for providing paid family and medical leave that meets Family and Medical Leave Act (FMLA) requirements, regardless of whether the employer is subject to the FMLA.
Under the wage-based method, the credit is calculated as a percentage of qualifying PFML wages paid to eligible employees.
How Much Is the PFML Tax Credit?
- If PFML wages equal 50% of an employee’s normal wages, the credit is 12.5% of PFML wages paid.
- The credit increases proportionately as PFML wages rise from 50% to 100% of normal wages.
- The maximum credit rate is 25% when PFML wages equal 100% of normal wages.
- Employers can claim the credit on up to 12 weeks of qualifying leave per employee each year.
Who Is a Qualifying Employee?
A qualifying employee is:
- A full-time or part-time employee
- Employed by the employer for at least one year, and
- Earning no more than 60% of the highly compensated employee limit
For 2026, that compensation threshold is $96,000.
Employer Requirements to Claim the PFML Tax Credit
To qualify, employers must have a written PFML policy in place before leave is taken. The policy must:
- Provide at least two weeks of annual paid family and medical leave, prorated for part-time employees,
- Include FMLA protections and
- Pay employees at least 50% of their normal wages while on qualifying leave
Under the TCJA, leave paid by a state or local government or required by state or local law was not considered when determining whether an employer’s policy met the minimum 50% wage replacement requirement.
Employers should also be aware that:
- Wage deductions must be reduced by the amount of credit claimed.
- Wages used to calculate other general business credits cannot also be used to calculate the PFML credit.
How Did the One Big Beautiful Bill Act Change the PFML Tax Credit?
The OBBBA made several significant changes to the Section 45S credit beginning in 2026.
1) New Premium-Based Credit Calculation Option
Instead of calculating the credit solely on actual PFML wages paid, employers may elect to calculate the credit based on premiums paid or incurred for insurance policies that provide paid family and medical leave coverage for qualifying employees.
This option is available regardless of whether employees actually take leave during the tax year.
2) State and Local Leave Programs Are Treated Differently
Leave required by state or local law, or paid by state or local governments, is now considered when determining whether an employer provides sufficient PFML to qualify for the credit.
However, that leave is not included when calculating the amount of cash itself.
3) Qualifying Employee Rules Have Changed
Beginning in 2026, qualifying employees are limited to those customarily employed at least 20 hours per week.
4) Shorter Service Requirement Allowed
Employers may elect to include employees who have completed at least six months of service, rather than requiring one full year of employment.
5) Deduction Limitations for Premiums
Employers using the premium method cannot claim a deduction for the portion of insurance premiums that corresponds to the PFML credit claimed.
IRS Guidance on the PFML Premium Method
IRS Notice 2026-28 primarily focuses on the new premium-based method for calculating the credit.
Under the guidance, employers can claim the PFML credit only for premiums that fund benefits that would qualify for the credit under the wage method. The IRS refers to this as “creditable coverage.”
If any part of the premium funds benefits that would not qualify under the wage method, that portion is not eligible for the credit under the premium method.
What Coverage Is Not Creditable?
The following coverage types are not considered creditable:
- Coverage for leave that is not paid family and medical leave,
- Coverage for leave payable to nonqualifying employees, as determined when the premium is paid or incurred,
- Coverage for leave required by state or local law or paid for by a state or local government, and
- Coverage that provides benefits other than wages.
How Should Employers Allocate Mixed Premiums?
Some insurance policies may cover both qualifying and nonqualifying leave, or both qualifying and nonqualifying employees.
In these situations, employers may use any reasonable allocation method, provided it:
- Is consistent with the policy terms, and
- Is supported by contemporaneous records.
The IRS also confirmed that employers may use the wage method for certain leave and the premium method for other leave. However, employers cannot claim both methods for the same underlying benefit.
Can Employers Rely on IRS Notice 2026-28?
Yes. The IRS has indicated that it expects future proposed regulations to reflect the guidance provided in Notice 2026-28.
Although those regulations will apply prospectively, taxpayers may rely on the current guidance for tax years beginning after 2025 and before the proposed regulations are issued.
Understanding Your PFML Tax Credit Opportunities
With the Section 45S paid family and medical leave tax credit now permanent and expanded under the OBBBA, employers should reevaluate their existing leave policies and determine whether additional tax-saving opportunities are available. The new premium-based calculation method may create benefits for employers that previously could not fully utilize the credit. If you have questions regarding PFML eligibility or how the new rules may affect your business, contact us.