Payroll Tax Planning Small Business

The Paid Family & Medical Leave Credit Is Permanent Now — Can Your Business Actually Use It?

Published August 14, 2026 by Invisible LLC Team · 8 min read

Most tax credits aimed at small employers are either too small to chase or gated behind something you'd never do anyway. The Section 45S credit for paid family and medical leave has historically been both — temporary enough that nobody built a policy around it, and narrow enough that most growing businesses didn't qualify. That changed. On August 5, 2026, Treasury and the IRS issued Notice 2026-28 (IR-2026-86), the implementation guidance for a credit that is now permanent and meaningfully wider than it was.

Key takeaways: Section 45S gives employers a general business credit worth 12.5% to 25% of wages paid to qualifying employees on family and medical leave, for up to 12 weeks per taxable year. Beginning in 2026 it's permanent, the service requirement drops to six months, part-timers working 20+ hours per week can count, and — new — you can base the credit on PFML insurance premiums instead of wages, with an election between the two methods. The gate that stops most businesses is unchanged and non-negotiable: you need a written policy providing at least two weeks of paid family and medical leave at at least 50% of normal wages. No policy, no credit — retroactively writing one in April doesn't work.

What actually changed for 2026

Three things, and they compound:

It's permanent. Section 45S was a temporary provision that Congress kept extending in short bursts. The One Big Beautiful Bill Act made it permanent, effective for tax years beginning in 2026. That matters more than it sounds: a credit with a two-year horizon isn't worth redesigning a leave policy around. A permanent one is.
Eligibility widened. Employers can now claim the credit for employees with six months of service (previously a full year), and for part-time employees customarily working 20 or more hours per week.
Premiums count. Beginning in 2026, you can claim the credit for premiums paid for a PFML insurance policy, not only for wages paid during leave. Notice 2026-28 covers how the premium method compares to the wage method, how to allocate qualifying premiums, and how to elect between them.

Treasury and the IRS have said proposed regulations consistent with this guidance will follow, so some mechanics will get sharper. The structural picture is stable enough to plan around now.

The gate: you need a written policy

This is where most businesses fall out, so deal with it first.

To claim anything under Section 45S, you must have a written policy that provides at least two weeks of paid family and medical leave annually to all qualifying employees, at a rate of not less than 50% of the wages normally paid to the employee. Part-time qualifying employees get a proportionate amount.

Two things follow that catch people:

You can't do this retroactively. The policy has to exist and cover the leave when the leave is taken. Discovering the credit at tax time and drafting a policy in April doesn't make last year's leave creditable. If you're reading this in August, the useful move is to get a policy in place for the remainder of the year — not to plan on backfilling.

Paid leave required by state or local law doesn't count toward the requirement. If you operate somewhere with a mandated paid-leave program, the leave that mandate compels is excluded from the calculation. You get credit for what you provide voluntarily, above the legal floor. For employers in states with strong PFML mandates, this is the difference between a real credit and a rounding error, and it's worth modeling before you invest in policy design.

How much it's actually worth

The credit is a sliding scale tied to how generous your policy is:

The minimum is 12.5% of wages paid to a qualifying employee during leave — available when you pay the floor, 50% of normal wages.
It increases by 0.25 percentage points for each percentage point by which your leave pay exceeds 50% of the employee's wages.
The maximum is 25%, reached when you pay 100% of normal wages during leave.
It applies to up to 12 weeks of leave per employee per taxable year.

So the arithmetic is linear and easy to model: pay 50%, get 12.5%. Pay 75%, get 18.75%. Pay 100%, get 25%.

Run it on a real case. An employee earning $60,000 takes eight weeks of leave, and your policy pays 60% of normal wages. Wages paid during leave are roughly $5,540 (eight weeks at 60% of a $60,000 salary). Your credit rate is 12.5% + (10 × 0.25) = 15%. Credit: about $830.

That's the honest scale of it for one employee. It's not transformative, and anyone telling you this credit pays for a leave program is selling something. What it does is meaningfully offset the cost of a policy you were already considering — and across several employees over several years, on a permanent provision, it's real money for a decision you'd have made anyway.

Who counts as a qualifying employee

Three tests:

Service. Employed by you for six months or more (the 2026 expansion; it was one year).
Hours. Full-time, or part-time customarily working 20 or more hours per week (also new for 2026).
Compensation. Below a ceiling set at 60% of the highly compensated employee threshold, indexed annually. The HCE threshold for 2026 is $160,000 (IRS Notice 2025-67), which puts the 2026 qualifying-employee compensation ceiling at $96,000.

That third test is the one people forget. Leave taken by your senior people generally won't generate a credit. This is a credit aimed at your hourly and mid-salary staff — which, for most of the businesses we work with, is where turnover actually hurts.

The new premium method

The genuinely new mechanic for 2026: instead of computing the credit from wages actually paid during leave, you can elect to compute it from premiums paid or incurred for an insurance policy providing family and medical leave coverage.

Why this matters practically: under the wage method, a year in which nobody takes leave produces no credit, even though you're carrying the cost of the benefit the whole time. If you fund your leave benefit through insurance, the premium method lets the credit track the cost you're actually bearing rather than the leave that happens to be taken.

Notice 2026-28 is where the detail lives — how to allocate qualifying premiums and how to make the election. Which method wins depends on your leave-utilization pattern and how your policy is funded, and it's a genuine modeling question rather than an obvious call. If you fund leave out of payroll, the wage method is likely still your answer.

Three catches before you count the money

It's a general business credit, so it's nonrefundable. It offsets income tax you owe. It does not generate a refund if you owe nothing. Two implications: a business with a loss year gets no immediate benefit (general business credits carry back and forward under the ordinary rules), and — importantly — most 501(c)(3) nonprofits cannot monetize this credit at all, because they have no federal income tax liability to offset. If you run a nonprofit and someone has pitched you on Section 45S as a reason to expand paid leave, that pitch is usually wrong. Expand leave because it's right for your people, not for this credit.

You must reduce your wage deduction by the credit amount. You don't get both the deduction for those wages and the full credit. So the real economic benefit is the credit net of the deduction you give up — meaningfully less than the headline percentage. Model it after tax, not before.

Pass-through owners should check the flow-through. As a general business credit it passes through to owners of S corps and partnerships and lands on individual returns, where it interacts with the ordinary general business credit limitations. For most owner-operators the credit is usable; "most" is not "all," and it's worth a five-minute check with whoever files your return before you build a policy around the benefit.

Should you actually do this?

An honest decision path:

You already offer paid parental or medical leave beyond what your state requires. Strong candidate. You may be leaving a credit on the table right now for a policy you're already paying for. Get the written policy documented to Section 45S standards and claim it. This is the single most common miss.
You've been considering paid leave and haven't pulled the trigger. The credit meaningfully improves the math and it's permanent, so the planning horizon finally justifies the work. Model it at 50%, 60%, and 100% wage replacement and see where the after-tax cost lands.
You're in a state with a robust mandated PFML program. Check carefully. The mandated portion is excluded, so your credit may be small — but voluntary top-ups above the mandate can still qualify.
You're a nonprofit. Probably not usable. See above.
You have no paid leave and no appetite to add it. Then this isn't a credit, it's a subsidy for a decision you haven't made. Skip it without guilt.

The bottom line

Section 45S is permanent, the door is wider for 2026 — six months of service, part-timers at 20+ hours, and a new premium-based method — and the credit runs 12.5% to 25% of leave wages for up to 12 weeks. The binding constraint is still the written policy at 50% or better, and it can't be backdated. If you already offer leave above your state's floor, you are the most likely person to be missing this.

You run a business; you shouldn't have to track which credits became permanent this month. If you'd rather have someone who watches this and tells you when something applies to you, that's the job — our payroll and benefits and tax compliance work is where a credit like this gets caught and documented properly. Get a quote and we'll look at your leave policy honestly, including telling you if there's nothing here for you.