- Employers can now claim tax credits on qualifying insurance premiums instead of only on paid wages.
- Employee eligibility has been expanded to those with six months of service working twenty-plus hours weekly.
- The Section 45S credit is now permanent for tax year 2026 under the Working Families Tax Cuts.
The Internal Revenue Service and the Treasury Department issued Notice 2026-28 on August 5, 2026, allowing employers to claim the paid family and medical leave credit on qualifying insurance premiums rather than only on wages paid during leave.
The new option applies for tax year 2026. Employers can elect to calculate the Section 45S credit using premiums paid or incurred for an insurance policy that provides paid family and medical leave benefits.
The change came under the Working Families Tax Cuts, part of the One Big Beautiful Bill Act. The law also made the credit permanent after temporary extensions dating to its pilot in 2017.
Free toolH-1B Cost Calculator OnlineTreasury Secretary Scott Bessent said the change should encourage more businesses to offer paid leave.
"Hardworking Americans should not have to choose between caring for a loved one and earning a paycheck. The Working Families Tax Cuts permanently expands the federal Paid Family and Medical Leave Tax Credit, giving businesses, especially small businesses, greater incentives to provide paid leave so workers can care for a newborn or other family member or recover from a serious illness without sacrificing their financial security. Today's guidance provides employers with the clarity they need to claim the enhanced credit, supporting American workers, families, and businesses."
The expanded credit gives employers two ways to calculate the eligible cost: wages paid to employees during qualifying leave or premiums paid for qualifying coverage. The premium method is aimed at companies that insure their leave obligations instead of paying benefits directly.
The IRS said the credit can range from 12.5% to 25% of eligible wages or premiums. A policy replacing 50% of an employee's wages qualifies for the 12.5% rate, while full wage replacement qualifies for the 25% rate.
The guidance also changes which workers can qualify for paid family and medical leave benefits. Employees become eligible after six months of service, down from one year, and part-time workers can qualify if they customarily work 20 hours or more per week.
The credit now covers qualifying insurance premiums
Under the new rules, a company with a qualifying PFML insurance policy can claim the credit based on premiums paid or incurred for that coverage. The employer does not need an employee to take leave during the tax year to receive the credit, provided the company maintains a qualifying policy.
That approach gives insured employers a way to calculate the credit from their coverage costs instead of tracking each employee's leave wages. The change may reduce administrative work for small businesses that fund leave through insurance markets.
| Credit calculation | Applicable rate described in the guidance |
|---|---|
| Coverage replacing 50% of an employee's wages | 12.5% |
| Coverage providing full wage replacement | 25% |
| Eligible cost basis | Wages or qualifying insurance premiums |
The credit remains tied to the cost of providing paid family and medical leave. Premiums for coverage that does not provide qualifying PFML benefits do not fall within the described calculation.
Six months of service and part-time work broaden eligibility
The law shortened the employee service requirement to six months. The prior standard required one year of service.
Part-time employees also entered the eligibility rules if they customarily work 20 hours or more per week. The change expands access to workers who would not have met the previous service or work-hour conditions.
The policy covers leave connected to a newborn, another family member, or recovery from a serious illness. Treasury described the expansion as a way to help workers take paid leave without giving up financial security.
IRS Chief Executive Officer Frank J. Bisignano said the permanent credit and expanded eligibility give employers additional ways to provide the benefit.
"The permanent expansion of the credit encourages businesses to provide paid family and medical leave. The changes enacted by the Working Families Tax Cuts will make more employers eligible for the credit and give them more ways to offer this benefit to their workers."
State-mandated leave can satisfy eligibility rules
Paid leave provided under a state or local mandate can be used to meet federal eligibility requirements under the guidance. Employers cannot, however, use the costs required by those mandates to calculate the federal credit amount.
That distinction separates eligibility from the amount used in the credit calculation. A mandated leave program may help an employer meet the federal conditions, while the related mandated costs remain outside the credit calculation.
The permanent Section 45S credit therefore combines a broader worker eligibility standard with a new insurance-based calculation option. Employers can assess qualifying coverage premiums for 2026 while continuing to apply the credit rules to eligible wages when that method fits their leave program.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
