Paid family and medical leave (PFML) can help employers attract and retain employees while giving workers financial support when they need time away to care for themselves or family members. For eligible employers, the Section 45S PFML tax credit can offset a portion of the cost of providing this benefit.
The One Big Beautiful Bill Act (OBBBA) made the credit permanent and expanded it beginning in 2026. The IRS subsequently issued Notice 2026-28 to explain the updated rules, with particular attention to the new option for calculating the credit based on qualifying insurance premiums.
Employers that already offer PFML should review the guidance to determine whether they qualify and which calculation method may be appropriate. Businesses that do not currently offer PFML may also want to reconsider whether the expanded credit makes the benefit more financially practical.
How the PFML tax credit works
The PFML tax credit was established by the Tax Cuts and Jobs Act. It is available to employers that provide qualifying employees with paid leave that is consistent with the Family and Medical Leave Act, even if the employer itself is not subject to the FMLA.
Under the original rules, an eligible employer could claim a general business credit based on a portion of the PFML wages it paid. The applicable percentage depends on the relationship between an employee’s PFML pay and normal wages:
- If PFML wages equal 50% of normal wages, the credit is 12.5% of the PFML wages paid.
- The credit percentage increases ratably as PFML wages rise above 50% of normal wages.
- The credit reaches 25% when PFML wages equal 100% of normal wages.
- The credit is generally limited to 12 weeks of PFML wages per employee each year.
Before the 2026 changes, a qualifying employee generally had to work for the employer for at least one year and earn no more than 60% of the highly compensated employee threshold. For 2026, the article source identifies that income limit as $96,000.
An employer must also have a written PFML policy in place before the leave is taken. Among other requirements, the policy must generally provide:
- At least two weeks of paid family and medical leave annually, prorated for part-time employees
- FMLA-related protections
- Pay equal to at least 50% of the employee’s normal wages during qualifying leave
Employers claiming the credit must reduce their wage or salary deduction by the amount of the credit. Wages used to calculate another general business credit cannot also be used to calculate the PFML credit.
Key PFML credit changes beginning in 2026
The OBBBA changes the PFML tax credit in several important ways:
- Employers may use a premium-based calculation. Instead of calculating the credit only from PFML wages actually paid, an employer may elect to calculate it from qualifying premiums paid or incurred for an insurance policy that provides PFML benefits. A credit may be available even if no employee takes leave during the tax year.
- State and local leave affects eligibility differently. Leave required by state or local law, or paid by a state or local government, is considered when determining whether the employer provided enough PFML to qualify. However, those amounts are not included when calculating the credit.
- A customary weekly-hours requirement applies. Qualifying employees are limited to those customarily employed for at least 20 hours per week.
- Employers may use a shorter service requirement. An employer may elect to include employees after six months of employment rather than waiting one year.
- Premium deductions must be adjusted. An employer cannot deduct the portion of qualifying insurance premiums equal to the PFML credit claimed.
What is the premium method?
Notice 2026-28 focuses on the new premium method. Under this approach, an employer can claim the credit only for the portion of a premium that funds a benefit that would qualify under the wage method if the benefit were paid. The IRS guidance calls this creditable coverage.
Coverage is not creditable when it funds:
- Leave that is not qualifying family and medical leave
- Benefits for an employee who is not a qualifying employee when the premium is paid or incurred
- Leave required by state or local law or paid by a state or local government
- A benefit other than wages
If one policy covers both qualifying and nonqualifying leave, or both qualifying and nonqualifying employees, the employer must allocate the premium. The allocation may use any reasonable method that is consistent with the policy and supported by contemporaneous records.
Can employers use both calculation methods?
An employer may use the wage method for some leave and the premium method for other leave. However, the same benefit cannot be used under both methods. For example, an employer cannot claim a wage-method credit for wages paid if it also claims a premium-method credit for insurance coverage that funded those same benefits.
Careful documentation will be important for employers that use both methods or maintain policies covering multiple types of leave and employees.
When the IRS guidance applies
The IRS expects to issue proposed regulations consistent with Notice 2026-28. According to the notice described in the source article, taxpayers may rely on the current guidance for tax years beginning after 2025 and before proposed regulations are issued.
Employers should review their written leave policies, employee eligibility rules, insurance coverage, premium allocations and supporting records with their tax advisors. A detailed review can help determine whether the wage method, premium method or a combination of the two is appropriate.
Next step
Contact our team to discuss how the expanded PFML tax credit and the IRS guidance may apply to your business.
Frequently Asked Questions
What is the Section 45S paid family and medical leave tax credit?
The Section 45S credit is a general business tax credit for eligible employers that provide qualifying paid family and medical leave. The credit can offset a portion of qualifying PFML wages or, under the expanded rules, certain qualifying insurance premiums.
How is the PFML tax credit calculated under the wage method?
When qualifying PFML wages equal 50% of an employee’s normal wages, the credit is 12.5% of the PFML wages paid. The percentage increases ratably and reaches 25% when PFML wages equal 100% of normal wages. The credit is generally limited to 12 weeks of qualifying leave per employee each year.
What is the new premium method for the PFML tax credit?
The premium method allows an eligible employer to calculate the credit using qualifying premiums paid or incurred for an insurance policy that provides paid family and medical leave benefits. The qualifying portion must fund coverage that would be eligible under the wage method if the benefit were paid.
Can an employer use both the wage method and the premium method?
Yes. An employer may use the wage method for some leave and the premium method for other leave. However, it cannot claim both methods for the same insured or paid benefit.
Which employees may qualify under the expanded rules?
The expanded rules described in the source article generally limit qualifying employees to those customarily employed for at least 20 hours per week. Employers may elect to include employees after six months of employment, subject to the other applicable requirements.
Does state-mandated paid leave qualify for the federal PFML tax credit?
Leave required by state or local law, or paid by a state or local government, may be considered when determining whether an employer provides enough leave to meet eligibility requirements. However, the state- or local-government-required or funded portion is not included when calculating the federal credit.
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