Paid Family and Medical Leave Tax Credit: 3 Changes in New Guidance

The Department of the Treasury and the Internal Revenue Service (IRS) have issued new guidance on the paid family and medical leave tax credit, but the change is more than a tax-planning issue. For some employers, it could reduce the cost of offering paid family and medical leave.

Most notably, the expanded Section 45S credit gives employers a new way to calculate the credit through paid leave insurance premiums.  

Key Changes to the Tax Credit

H.R. 1, P.L. 119-21, commonly referred to as the One Big Beautiful Bill Act, made the Section 45S credit permanent and allows employers to claim the credit for up to 12 weeks of paid leave.

The legislation also made other changes to the credit:

• Expanded eligibility: Employers can claim the credit for employees with six months of service and for part-time employees customarily working 20 hours or more per week.
• Expanded coverage: Employers can claim the credit for insurance premiums to provide leave or for wages paid during leave.
• State and local mandates: Employers can count leave provided under state or local mandates toward the eligibility for this federal tax credit, but not toward the credit calculation.

What Notice 2026-28 Covers

Notice 2026-28, issued Aug. 5, 2026, explains how the new premium method works alongside the existing wage method and what employers need to document to claim the credit.

Under the wage method, the credit ranges from 12.5% to 25% of qualifying wages paid, for up to 12 weeks of leave per employee per taxable year. Under the new premium method, the applicable percentage is applied to qualifying insurance premiums instead.

The portion of a premium that funds leave required by state or local law doesn’t qualify for the credit. However, required leave may be considered when determining whether the employer meets Section 45S eligibility requirements. Premiums covering someone who is not a qualifying employee at the time the premium is paid or incurred do not qualify.

Keep an eye out for proposed regulations from the Treasury and the IRS, which are expected to provide additional guidance on the Section 45S credit. Comments on Notice 2026-28 are due by Oct. 16, 2026.

More info: Notice 2026-28