Big Tax Savings: IRS Expands the Paid Family and Medical Leave Credit

The Internal Revenue Service (IRS) released Notice 2026-28, offering businesses crucial guidance on the permanently expanded Paid Family and Medical Leave (PFML) tax credit under Section 45S. This change stems from the One Big Beautiful Bill Act (OBBBA), which made the temporary tax incentive permanent and significantly expanded its reach. If your business offers or is considering offering paid leave, these new rules can heavily offset your costs.

What is the Section 45S Tax Credit?

• Credit Amount: Businesses can claim a general business tax credit ranging from 12.5% to 25% of costs.

• Duration: Covers up to 12 weeks of family and medical leave per qualifying employee per taxable year.

• Purpose: Applies to leave taken for major life events, such as the birth of a child, caring for a sick family member, or personal medical issues. 

The Biggest Change: The New "Premium Method"

Previously, employers could only claim this tax credit based on the actual wages they paid directly to workers on leave. Starting in 2026, the IRS introduces a massive upgrade: 

• Insurance Premiums Eligible: You can now claim the credit on premiums paid for PFML insurance policies, not just direct wages. 

• Flexible Tracking: Employers have considerable latitude to choose between the Wage Method or the Premium Method. 

• Hybrid Approach Allowed: You can combine methods for different types of leave, provided you do not double-dip or claim both credits for the exact same instance of leave. 

• Blended Policy Rules: If your insurance policy bundles creditable PFML with non-creditable coverage (like generic short-term disability covering non-qualifying workers), you can use any reasonable allocation method backed by clear, contemporaneous records to isolate your eligible premium costs. 

Expanded Eligibility Under the New Rules

The OBBBA lowered the barriers to entry, making it easier for more of your workforce to qualify:

• Shorter Service Requirement: Employees only need six months of service to be considered "qualifying employees," down from the previous one-year mandate. 

• Part-Time Inclusion: The credit now covers part-time staff members who customarily work 20 hours or more per week. 

• State Mandate Clarity: While leave provided to meet state or local mandates counts toward eligibility, the premiums or wages paid under those legal mandates cannot be factored into your federal credit calculation. 

Action Steps for Employers

• Review Current Policies: Audit your employee handbook to verify your written policy aligns with Section 45S guidelines.

• Consult with Your Insurance Provider: If you purchase commercial leave insurance, ask them to help you break down the "blended premium" costs for compliance tracking.

• Maintain Strict Documentation: Ensure your payroll, HR, and time-tracking systems maintain contemporaneous records to substantiate your claims.

• Talk to Your Tax Advisor: Because you can rely on this guidance for the upcoming tax year before the final regulations are published, now is the perfect time to build your tax strategy.

  
  

Disclaimer: This blog post is for informational purposes only and does not constitute formal tax or legal advice. Please reach out to our office directly to discuss how these IRS guidelines specifically impact your business tax filing.