Expanded Paid-Leave Tax Credit Gives Employers More Ways To Qualify
Employers offering paid family and medical leave will have greater access to a federal tax incentive beginning in 2026. Guidance released by the Treasury Department and IRS explains several changes intended to make the credit available to more businesses while providing employers with additional ways to structure qualifying benefits.
The employer credit for paid family and medical leave, established under Section 45S of the Internal Revenue Code, was made permanent and expanded by the Working Families Tax Cuts. Eligible employers may receive a general business tax credit equal to 12.5% to 25% of qualifying wages paid while an employee is on leave.
The credit can apply to as many as 12 weeks of paid leave for each qualifying employee during a tax year. Covered leave may include time taken to recover from a serious medical condition or care for a newborn or certain family members with serious health needs.
One significant change reduces the amount of time an employee must work for an employer before qualifying. Businesses may now include employees who have completed at least six months of service. Part-time employees who ordinarily work 20 or more hours per week may also qualify.
Employers will also gain another way to calculate the benefit. Starting in 2026, a business may claim the credit based on premiums paid for a qualifying paid family and medical leave insurance policy. Previously, the credit focused on wages paid directly to employees during approved leave.
IRS Notice 2026-28 provides initial instructions for using the insurance-premium method. The guidance addresses how qualifying premiums should be allocated and how employers can choose between calculating the credit from insurance premiums or wages.
The revisions also clarify how state and local paid-leave requirements interact with the federal incentive. Leave provided under a government mandate may help an employer satisfy the program’s eligibility requirements. However, payments required by state or local law cannot be included when calculating the federal credit itself.
For small and midsized businesses, the expansion could make paid-leave benefits more financially practical. Employers that previously did not qualify because of employee tenure, part-time staffing or the way their leave benefits were funded may now have an opportunity to claim the credit.
Treasury and the IRS plan to release proposed regulations offering more comprehensive direction. The agencies are also accepting public comments about implementing the revised credit.
Businesses that provide paid leave—or are considering adding the benefit—should review their written policies, employee eligibility rules and insurance arrangements with a tax professional. Because the available calculation methods can produce different results, employers may also want to compare the wage-based and premium-based approaches before making an election.
Source: IRS
