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The federal employer credit for paid family and medical leave has been available since 2018, but 2026 is the first year it runs under a new set of rules. A 2025 law made the credit permanent, added a way to claim it on insurance premiums, and changed who counts as a qualifying employee. In August 2026, the IRS published guidance on the premium method. Here is how the credit is built, with the caveat that a tax adviser confirms eligibility and the numbers.
Section 45S was added by the 2017 tax law as a temporary provision and extended twice. Public Law 119-21, enacted July 4, 2025, removed its end date and amended it for taxable years beginning after December 31, 2025. The main changes:
The credit is a percentage of qualifying wages or qualifying premiums. That "applicable percentage" starts at 12.5 percent and rises by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent of normal wages, up to a ceiling of 25 percent.
IRS Notice 2018-71 works through examples. A policy paying 75 percent of normal wages exceeds 50 percent by 25 points, so the rate is 12.5 percent plus 6.25 points, or 18.75 percent. A policy paying 100 percent reaches the 25 percent maximum. In one of the notice's examples, an employee normally paid $1,000 a week takes four weeks of leave at 75 percent pay, the employer pays $3,000, and the credit is $562.50, which is 18.75 percent of $3,000.
For the premium method, the statute adds one rule: the rate of payment under the insurance policy is determined without regard to whether any qualifying employee actually took leave during the year. The rate comes from the policy's terms rather than from claims. If you already have a policy and are unsure what it pays, the policy translation tool can summarize its benefit terms in plain English before your adviser reviews it.
Under the wage method, the wages taken into account for an employee cannot exceed the employee's normal hourly wage rate multiplied by the hours of family and medical leave taken, with pay for non-hourly employees prorated to an hourly rate under IRS rules. No more than 12 weeks of leave per employee per year can count. "Wages" here uses the federal unemployment tax definition without its dollar cap, and excludes amounts used to figure any other general business credit.
Only leave for family and medical purposes counts. The statute ties those purposes to the reasons listed in the Family and Medical Leave Act, whether the leave is provided under that Act or under an employer's own policy. Paid vacation, personal leave and ordinary medical or sick leave are excluded unless the leave is specifically for one of those purposes.
Notice 2026-28, published in Internal Revenue Bulletin 2026-34 on August 17, 2026, explains how the premium method works until proposed regulations are issued. Its core rule is that a premium earns the credit only to the extent it funds a benefit that would qualify under the wage method, which the notice calls creditable coverage. A premium, or the portion of one, is not for creditable coverage if it pays for:
When one policy provides both creditable and noncreditable coverage, the employer must allocate the blended premium using a reasonable method that is consistent with the policy terms, supported by contemporaneous records, based on objective criteria and applied consistently. An employer may use both methods in the same year, but not for the same instance of leave: if a premium was claimed, the benefits that premium funded cannot also be claimed under the wage method.
The notice says taxpayers may rely on it for taxable years beginning after December 31, 2025, and before proposed regulations are issued. The IRS asked for comments by October 16, 2026, including on how the premium method applies to voluntary state-facilitated programs administered by private insurers.
There is also a deduction trade-off. The same 2025 law amended section 280C(a) so that no deduction is allowed for the portion of premiums equal to the premium-method credit, in the same way the wage deduction is reduced by the wage-method credit.
An eligible employer has a written policy that gives each qualifying employee who is not part-time at least 2 weeks of annual paid family and medical leave, with a proportional amount for part-time employees based on their expected weekly hours. The policy must pay at least 50 percent of the wages normally paid to the employee.
Notice 2018-71 adds practical points. The written policy may be one document or several. It generally has to be in place before the leave for which the credit is claimed is taken, and it is treated as in place on the later of its adoption date or its effective date. An employer that offers the leave to qualifying employees who are not covered by title I of the FMLA also needs the statute's non-interference language, a promise not to interfere with rights under the policy or retaliate against anyone who opposes a prohibited practice; the notice includes sample wording.
A qualifying employee must meet all three tests:
The IRS's table of retirement plan limits shows that highly compensated employee threshold at $160,000 for 2025. For credits in 2026, where the preceding year is 2025, 60 percent works out to $96,000 of 2025 compensation. Notice 2018-71 explains that the preceding year is generally the calendar year, with options for employers on a fiscal year, so a tax adviser should confirm the right figure for your situation.
Can a Florida employer claim the credit on PFML insurance premiums?
If the employer has a paid family and medical leave insurance policy in force during the year and meets the other requirements, section 45S lets it elect the premium method. Under IRS Notice 2026-28, premiums count only to the extent they fund leave that would qualify under the wage method.
Does California Paid Family Leave count toward the credit?
Leave paid by a state or required by state law now counts when deciding whether the employer provides the minimum leave, but it is excluded from the credit amount. Under the new IRS notice, premiums for coverage of state-required or state-paid leave are not creditable either.
What form is used to claim the credit?
The IRS says eligible employers use Form 8994 to figure the credit for paid family and medical leave. The credit is part of the general business credit, so it feeds into the business's broader credit calculation.
Truscott's paid leave and tax credit assessment takes about a minute and shows what a qualifying plan would need, with no documents or employee names required. Truscott reviews PFML insurance options where licensed and appointed, and your tax adviser confirms eligibility, the method election and the credit amount.
Sources checked September 24, 2026. This article is general information, not tax or legal advice; a tax adviser confirms eligibility, the method election and the credit amount.
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