Paid family and medical leave can be an important employee benefit, but it also creates payroll, insurance, and tax decisions for the employer. Beginning with tax years after December 31, 2025, federal law makes the Section 45S employer credit permanent and adds a new way to calculate it.
For 2026, an eligible employer may elect to base the credit on qualifying wages paid during family and medical leave or on qualifying premiums paid for an insurance policy that funds the benefit. The better method depends on the plan design, employee population, expected leave use, and quality of the employer’s records.
What changed for the paid family leave tax credit in 2026?
Public Law 119-21, Section 70304 made the Section 45S credit permanent and expanded it for tax years beginning after December 31, 2025. The law now permits two calculation methods:
- Wage method: Base the credit on eligible wages actually paid to qualifying employees while they are on family and medical leave.
- Premium method: Base the credit on eligible premiums paid or incurred for an insurance policy that provides qualifying paid family and medical leave coverage.
The IRS explains the premium method in Notice 2026-28. The guidance is particularly relevant for employers that insure the leave benefit rather than paying every claim from general business assets.
Compare the wage method and premium method
When the wage method may fit
Under the wage method, the credit generally ranges from 12.5% to 25% of eligible wages paid to a qualifying employee for up to 12 weeks of family and medical leave during the tax year. The percentage depends on how the leave-pay rate compares with the employee’s normal wages.
This method may be easier to evaluate when the employer pays leave directly through payroll and has reliable records identifying the employee, leave dates, qualifying purpose, normal rate of pay, and leave wages.
When the premium method may fit
The premium method may be available when an employer maintains an insurance policy for paid family and medical leave. Only the portion of a premium that funds creditable coverage can enter the calculation. If a policy combines qualifying coverage with nonqualifying benefits or covers both qualifying and nonqualifying employees, the employer must allocate the premium using a reasonable, consistently applied method supported by contemporaneous records.
An employer may use the wage method for some leave and the premium method for other leave. However, Notice 2026-28 prohibits claiming both methods for the same funded benefit. Payroll records and insurer data therefore need to be reconciled before the return is prepared.
The written leave policy still comes first
The calculation method does not replace the eligibility rules. A Section 45S credit generally requires a written policy that covers qualifying employees and provides at least two weeks of annual paid family and medical leave for full-time qualifying employees, with a proportionate amount for part-time employees. The policy must generally provide at least 50% of normal wages during qualifying leave.
The 2026 law also revises the qualifying-employee rules, including the service-period election, annualized compensation treatment, and a minimum customary work schedule. Employers should review employee census data rather than assume every person covered by a broader benefits policy produces a federal credit.
Leave must be designated for qualifying family and medical purposes. A general pool of vacation or personal time does not automatically satisfy the Section 45S requirements merely because an employee uses it for a family or medical reason.
Coordinate federal rules with state and local leave programs
Beginning in 2026, leave required by state or local law or paid by a state or local government may count when determining whether the employer provides enough leave to be an eligible employer. But that mandated or government-paid leave is not included when calculating the federal credit.
This distinction is important for multistate employers and businesses with employees in Washington, DC, Virginia, Maryland, or remote locations. The employer should map which portion of the benefit is required, which portion it voluntarily funds, and whether an insurer combines the two in a single premium.
Build the credit file before tax preparation
Good documentation supports both eligibility and the amount claimed. A practical file should include:
- The written leave policy, adoption date, and effective date.
- Employee eligibility and compensation data used for the year.
- Documentation showing that leave was taken for a qualifying purpose.
- Normal wage rates, leave-pay percentages, dates, and hours or weeks of leave.
- Payroll reports separating qualifying leave wages from vacation, sick leave, and other paid time off.
- Insurance contracts, premium invoices, coverage schedules, and carrier statements.
- The method used to allocate blended premiums between creditable and noncreditable coverage.
- State or local benefits and mandates separated from the federal credit calculation.
- Support showing that wages or premiums were not counted twice or used inconsistently for another credit.
The current Form 8994 page remains the IRS starting point for claiming the credit. Because revised forms and proposed regulations may follow the 2026 law and notice, employers should check for updates before filing.
A 2026 planning checklist for small employers
- Confirm that the written policy reflects the current federal rules.
- Identify which employees may be qualifying employees for 2026.
- Separate qualifying family and medical leave from general paid time off.
- Ask the insurer whether premiums can be divided between creditable and noncreditable coverage.
- Model the wage method and premium method using the same employee data.
- Reconcile payroll, benefits, and general-ledger records.
- Review related employers under the federal aggregation rules.
- Coordinate federal treatment with applicable state and local leave requirements.
- Track the related wage or premium deduction adjustment.
- Complete the analysis before the income-tax return is finalized.
Connect the benefit decision to your broader tax plan
The paid family and medical leave credit should not be evaluated in isolation. A useful analysis also considers employee retention, plan cost, payroll administration, cash flow, insurance terms, and other general business credits.
Reckenen helps small and closely held businesses evaluate federal and state incentives through our business tax credit services. Our tax planning and preparation work connects eligibility, payroll data, bookkeeping, and the final return so the credit is supported rather than discovered at the last minute.
Schedule a Conversation
If your business provides or insures paid family and medical leave, now is a good time to review the 2026 rules. Schedule a conversation with Reckenen to compare the wage and premium methods and identify the records your business will need.
This article is for general informational purposes only and is not tax, legal, human-resources, or investment advice. Eligibility and credit amounts depend on the employer’s written policy, workforce, benefits, and applicable federal, state, and local law. Consult qualified tax and legal professionals before acting.