If you offer or are thinking about offering paid family and medical leave to your employees, 2026 just became a much more profitable year to do it. The IRS has issued new guidance permanently expanding the Paid Family and Medical Leave Tax Credit under Section 45S, and the changes mean more employers than ever can now turn a valuable benefit into real tax savings.

For small and mid-sized U.S. businesses, this update matters. It lowers the bar for eligibility, adds a simpler way to calculate the credit, and locks in a benefit that used to expire every few years. Here's what you need to know before your next filing.

What Is the Paid Family and Medical Leave Tax Credit?

The Employer Paid Family Leave Tax Credit, formally known as the Section 45S credit, is a federal general business credit available to employers who voluntarily provide paid family and medical leave to their workers. Instead of just being a "nice to have" HR perk, paid leave now comes with a direct payroll tax credit benefit built right into your business tax return.

Under the expanded rules that took effect with the Working Families Tax Cuts, the credit was made permanent no more waiting each year to see if Congress would renew it. Eligible employers can generally claim a credit ranging from 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family or medical leave per taxable year. The more of an employee's normal wages you pay during leave, the higher your credit percentage climbs.

What's New in 2026: Section 45S Explained

Section 45S isn't a new law; it dates back to the 2017 Tax Cuts and Jobs Act, but 2026 brings the biggest changes since it was introduced. The IRS recently issued guidance (Notice 2026-28) implementing several updates that expand who can benefit:

• The credit is now permanent. Employers no longer need to worry about it lapsing.
  
• A new "premium method" is available. Employers can calculate the credit based on premiums paid for a qualifying paid family and medical leave insurance policy, instead of only tracking wages paid during actual leave.
  
• Part-time employees qualify sooner. The service requirement has been lowered, and part-time employees who customarily work at least 20 hours per week are now eligible.
  
• Broader employer eligibility. More businesses, across more industries, can now structure a compliant paid leave policy and claim the credit.

For employers who have historically found the wage-tracking requirements too complex to bother with, the premium method removes one of the biggest administrative headaches: the credit amount under this method doesn't depend on whether an employee actually took leave during the year, only on the premiums paid for qualifying coverage.

Who Qualifies for the Paid Family Leave Tax Credit?

To claim the credit, your business needs a written paid family and medical leave policy that meets IRS requirements. At a minimum, your policy must:

• Provide at least two weeks of paid family and medical leave annually to full-time qualifying employees, prorated for part-time employees
  
• Pay at least 50% of the employee's normal wages during that leave
  
• Cover leave taken for FMLA-qualifying reasons, such as the birth or adoption of a child, caring for a family member with a serious health condition, or the employee's own serious health condition
  
• Apply to employees earning below the IRS's compensation threshold for the year (adjusted annually; confirm the current figure before filing)

The credit generally applies to leave taken by employees who've worked for you for at least one year, though employers can elect to extend eligibility to employees with as little as six months of service. Because the written policy has to be in place before the leave is taken, timing matters; a policy adopted mid-year only covers leave taken after its effective date.

Can Small Businesses Claim the Paid Family Leave Credit?

Yes. Section 45S was designed with small and mid-sized employers in mind, and the 2026 expansion makes it more accessible, not less. You don't need a large HR department or a formal PFML insurance program to qualify; a compliant written policy and accurate payroll wage tracking are the two essential ingredients. That said, small businesses without dedicated tax or payroll staff are also the ones most likely to leave this credit on the table simply because nobody caught it. If you're already paying employees during leave, you may be sitting on a credit you haven't claimed.

How Much Is the Employer Paid Family Leave Tax Credit Worth?

The credit is calculated as a percentage of wages paid during qualifying leave, starting at 12.5% for employers who pay 50% of normal wages, and increasing incrementally up to a maximum of 25% for employers who pay 100% of normal wages. It applies to up to 12 weeks of leave per employee, per taxable year. For a business paying several employees through parental or medical leave over the course of a year, that percentage can add up to a meaningful reduction in tax liability, though employers should note that wages used to calculate the credit can't also be deducted as a business expense for the same amount.

What Forms Are Required to Claim the Credit?

Employers claim the credit using Form 8994, Employer Credit for Paid Family and Medical Leave, which flows into Form 3800, General Business Credit, on your federal return. Partnerships and S corporations report the credit through Schedule K to their partners or shareholders. Because the credit interacts with your wage deduction and general business credit calculations, this is one area where it pays to have clean payroll records you'll need documentation of the written policy, wages paid during leave, and (if using the new premium method) your insurance premium payments.

Does Paid Family Leave Automatically Qualify for a Tax Credit?

Not automatically. Simply paying an employee during leave doesn't trigger the credit; you need a written policy in place before the leave begins, and that policy has to meet the IRS's minimum leave duration, pay rate, and eligibility requirements. This is where a lot of employers unintentionally disqualify themselves: they pay generous leave benefits informally, without the documentation the IRS requires to support a credit claim.

Getting Paid Leave Compliance Right Starts With Payroll Accuracy

Whether you're calculating the credit using the traditional wage method or the new premium method, the foundation is the same: accurate, well-documented payroll. You need to know exactly what each qualifying employee was paid during leave, how that compares to their normal wages, and how it's coded in your payroll system for tax reporting.

This is exactly where many growing U.S. businesses run into trouble. Manual tracking of leave wages across multiple employees, pay frequencies, and locations is time-consuming and error-prone, and a miscalculation can mean either an underclaimed credit or a compliance headache down the road.

PayProNext's payroll platform is built for U.S. employers who need this kind of accuracy without adding headcount to their finance team. From tracking leave wages correctly to keeping your payroll records audit-ready for credits like Section 45S, PayProNext helps you turn payroll compliance from a year-end scramble into a background process that just works.

Frequently Asked Questions

What is the paid family and medical leave tax credit?

It's a federal general business credit under IRC Section 45S that lets eligible employers claim 12.5% to 25% of wages paid to qualifying employees during family or medical leave, up to 12 weeks per year.

Who qualifies for the paid family leave tax credit?

Employers with a written policy that meets IRS requirements for at least two weeks of leave, 50%+ wage replacement, and coverage for FMLA-qualifying reasons for employees below the compensation threshold.

How do employers claim the paid leave tax credit?

By filing Form 8994 and reporting the credit through Form 3800 on their federal business tax return.

What is Section 45S?

Section 45S is the section of the Internal Revenue Code that establishes the employer credit for paid family and medical leave, now made permanent and expanded under the Working Families Tax Cuts.

How much is the employer paid family leave tax credit?

Between 12.5% and 25% of qualifying wages, depending on how much of the employee's normal pay is replaced during leave, capped at 12 weeks per employee per year.

Can small businesses claim the paid family leave credit?

Yes. There's no business size requirement; any eligible employer with a compliant written policy and accurate wage records can claim it.