At a glance: The Section 45S credit is now permanent. Beginning in 2026, an eligible employer may calculate the credit using qualifying leave wages or qualifying PFML insurance premiums. The IRS says the credit can range from 12.5% to 25%, subject to the statutory requirements and the employer's facts.

What changed for 2026?

Section 45S provides a general business tax credit to eligible employers that provide qualifying paid family and medical leave. Amendments enacted in 2025 made the credit permanent and expanded it for taxable years beginning after December 31, 2025. In August 2026, Treasury and the IRS issued Notice 2026-28 explaining how several of those changes operate while proposed regulations are being developed.

The most operationally significant change is a new premium method. An employer that maintains a qualifying PFML insurance policy may elect to determine the credit using eligible premiums paid or incurred, rather than relying only on wages actually paid during qualifying leave. The amendments also address employee service and hours, employer aggregation, and how state or local paid-leave programs affect eligibility.

Wage method versus premium method

Wage method

Under the wage method, the employer calculates the credit using qualifying wages actually paid to qualifying employees while they are on family and medical leave. The employer must be able to connect the claimed amount to the employee, the qualifying leave, the applicable rate of pay, and the written policy governing the benefit.

Premium method

Under the new premium method, an employer may calculate the credit using premiums paid or incurred for insurance that funds creditable PFML coverage. A premium is not automatically creditable in full merely because the policy includes a paid-leave benefit. Portions funding nonqualifying leave, nonqualifying employees, state- or local-mandated leave, or benefits that would not meet the wage-method requirements must be excluded.

If a policy combines creditable and noncreditable coverage, Notice 2026-28 requires the employer to allocate the blended premium. The allocation may use any reasonable method that is consistent with the policy terms, based on objective criteria, applied consistently for the taxable year and across the aggregated employer group, and supported by contemporaneous records.

Can an employer use both methods?

Yes. An employer may use the wage method for some leave and the premium method for other leave. The same funded benefit cannot support both credits, however. If an insurance premium funds a particular leave benefit and the employer claims a premium-method credit for that coverage, the employer cannot also claim the wage-method credit for the portion funded by that premium. Separately funded portions require a documented split.

Employee eligibility and employer policy controls

The 2026 amendments permit an employer election that can include employees after six months of service rather than the prior one-year period. The qualifying-employee definition is also limited to employees customarily working at least 20 hours per week. These rules need to be translated into repeatable eligibility fields rather than handled informally at return-preparation time.

Section 45S continues to depend on a written policy that satisfies the applicable requirements. An employer should coordinate the policy language with payroll, benefits administration, insurance coverage, employee eligibility, leave coding, and tax reporting. A policy that promises a benefit but is not reflected consistently in operational records creates avoidable support problems.

State and local paid-leave programs

Leave required by state or local law, or paid for by a state or local government, can now count when determining whether the employer provides enough paid family and medical leave to be an eligible employer. That mandated or government-paid leave does not increase the federal credit calculation itself. Employers operating in multiple jurisdictions therefore need to distinguish leave used for the eligibility test from wages or premiums used to calculate the claimed credit.

Section 45S employer readiness checklist

  • Identify the taxable year and confirm which Section 45S rules apply.
  • Confirm that the written PFML policy satisfies current requirements.
  • Document the employer group and any Section 414 aggregation analysis.
  • Define qualifying employees using service and customary-hours data.
  • Map each covered leave type to the qualifying statutory categories.
  • Separate state- or local-mandated leave from credit-calculation amounts.
  • Select the wage method, premium method, or a controlled combination.
  • For wage claims, reconcile leave records to payroll wages and funding sources.
  • For premium claims, retain policies, invoices, payment evidence, covered-population data, and allocation support.
  • Document blended-premium assumptions using objective, consistently applied criteria.
  • Prevent duplicate claims for the same funded leave benefit.
  • Retain the election, calculations, review evidence, tax workpapers, and adviser conclusions.

Records employers should preserve

A practical evidence file should connect the tax position to the underlying benefit administration. Depending on the method and the employer's circumstances, that file may include the written policy and amendments; employee service and customary-hours data; leave requests and approvals; payroll registers and leave codes; insurance policies, invoices and proof of payment; benefit and covered-population details; allocation calculations; state and local program analysis; controlled-group documentation; method elections; reconciliations; and the final return workpapers.

The premium method deserves particular attention because Notice 2026-28 expressly calls for contemporaneous support when a blended premium is allocated. Reconstructing an allocation after the return is prepared is weaker than preserving the criteria, source data, reviewer, and calculation when the allocation is made.

What employers should do now

Employers considering the credit should bring tax, payroll, HR, benefits, and insurance information together before choosing a calculation method. The first step is not estimating a credit amount. It is determining whether the written policy, employee population, leave categories, funding arrangement, and records can support the position consistently.

Treasury and the IRS have announced that proposed regulations are forthcoming. Notice 2026-28 states that taxpayers may rely on its guidance for taxable years beginning after December 31, 2025 and before proposed regulations are issued. Employers should monitor later guidance and have their tax advisers review the final position before filing.

Frequently asked questions

What is the maximum Section 45S credit rate?

The IRS describes a credit ranging from 12.5% to 25% of qualifying wages, with the exact rate depending on the percentage of normal wages paid and the statutory calculation. Premium-method calculations require separate application of the 2026 guidance.

Can state-mandated paid leave be included?

It may count toward determining whether an employer satisfies the eligibility requirement, but it is not included in the federal credit calculation. The distinction should be documented.

Does buying PFML insurance make the entire premium creditable?

No. Only the portion funding creditable coverage is eligible. Blended premiums must be reasonably allocated and supported using objective, consistently applied criteria.

Primary sources

IRS: Treasury and IRS guidance on the permanent expansion of the paid family and medical leave credit
IRS Notice 2026-28 in Internal Revenue Bulletin 2026-34
IRS: Section 45S Employer Credit for Paid Family and Medical Leave FAQs

Important: This guide is general educational information, not tax, legal, payroll, benefits, insurance, or accounting advice. Eligibility and credit calculations depend on the employer's facts, written policy, funding arrangement, applicable law, and current guidance. Consult qualified advisers before claiming the credit.