Talk SHOP · Issue 1 · October 2026
The federal tax credit for employers that offer paid family and medical leave is now permanent, and better than ever. It's one of the biggest wins for paid leave in years, backed by rare bipartisan support, and great news for small business owners and their employees.
Thanks to the leadership of Senators Deb Fischer (R-NE) and Angus King (I-ME), the Section 45S tax credit, the only federal incentive of its kind, was enhanced and made permanent in the 2025 reconciliation law. First enacted in 2017 as a temporary pilot and extended twice, the credit helps employers, particularly small businesses, offset up to one-quarter of the cost of providing paid leave to their workers. Now that it no longer has an expiration date, employers can confidently factor it into decisions about offering or expanding paid leave.
The new law adds several welcome bells and whistles, most notably:
Yet many employers still don't know how the credit works, who qualifies, or how to design a leave policy that meets its requirements amid a patchwork of state rules.
That's where Engage HQ comes in. Our first Policy Payoff breaks down the paid leave tax credit, explains what changed, and helps you figure out how to put it to work for your business. Offering paid leave just got more affordable!
A practical guide to a bipartisan federal tax credit, made permanent by law in 2025, with enhancements taking effect in 2026. The two pages below first appeared in the Engage Reader, Edition VIII.
Infographic first appeared in the Engage Reader, Edition VIII, June 2026.
This document is for informational purposes and does not constitute legal or tax advice. It reflects existing IRS guidance (e.g., IRS Notices 2026-28 and 2018-71) and a legislative analysis of changes in the 2025 reconciliation law.
The Family and Medical Leave Act (FMLA) provides leave for four reasons: (1) Parental leave for the birth and care of a newborn child, or placement of a child for adoption or foster care; (2) Caregiving leave to care for a spouse, child, or parent with a serious health condition; (3) Medical leave for the employee’s own serious health condition that makes them unable to perform their position; and (4) Military-related leave for qualifying exigencies and military caregiver leave. A policy may qualify if it provides leave for one or more FMLA-qualifying reasons and otherwise satisfies the applicable 45S requirements.
No. Employees do not need to be FMLA‑eligible. The 45S credit uses FMLA-qualifying reasons, but it does not require the other FMLA eligibility rules to be met (1,250 hours or the worksite-size threshold). Separately, 45S requires that employees have worked for the employer at least one year, or six months if the employer chooses. The employer must include “non-interference” language in its written policy.
Any employer, regardless of industry or size, can receive the 45S credit so long as they have a federal tax liability. Those operating at a loss could carry forward general business credits like this. Tax-exempt employers, such as nonprofits, cannot claim the credit.
The employer’s written policy must provide part-time employees with paid leave that is proportionate to their customary weekly hours. Part-time employees working fewer than 20 hours per week may be excluded from the written policy, but those working 20 or more hours who otherwise qualify must be included.
Employees who earned more than $96,000 in 2025 are not qualifying employees for purposes of calculating the 45S credit in 2026. Employers may choose to include higher-paid employees in the written policy, but their wages are not eligible for the credit.
For the $96,000 annual compensation limit, employers must count all cash remuneration an employee received during the year (2025 for the 2026 credit)—including overtime, bonuses, or commissions. For employees who worked only part of the year, compensation is annualized. This determines whether the employee is eligible for the employer credit.
By contrast, the wage‑replacement rate is calculated using the employee’s “wages normally paid”—a narrower concept that reflects their regular weekly earnings and excludes non-regular compensation (e.g., irregular overtime or discretionary bonuses).
State PFML benefits do not count toward the 45S credit, and state eligibility rules usually differ from 45S eligibility. Amid this state patchwork, employers must still ensure that all qualifying employees receive at least the 45S minimum standards under the written policy.
Yes. In PFML states, employers may provide top-up payments above the state benefit if they find it administratively feasible, and those employer-paid amounts can count toward the 45S credit. State-mandated benefits never generate the credit, but under the 2025 reconciliation law the employer may aggregate the state benefit and the employer’s top-up to meet the 45S requirement that qualifying employees receive at least 50% wage replacement.
Yes. Employer‑paid portions of STDI can count toward the 45S credit when they cover an employee’s own medical leave, consistent with the qualifying reason in FMLA, and meet the 45S minimum standards. Only the employer‑funded portion is credit‑eligible; any employee‑paid portion does not count. State PFML program benefits never count toward the 45S credit.
Employers should maintain records that support how they calculated the 45S credit, including the written policy, each employee’s qualifying status, the number of employees covered under the written policy, the amount of employer-paid leave provided to employees on leave or premiums paid for employees, the wage-replacement rate, and the duration of leave taken. These records ensure the employer can substantiate the amount of the credit claim with the IRS. Employers should also work closely with their payroll and HR administration systems to ensure these records are captured accurately.
Yes. Employers may adopt their written policy at any point during the year, but it must be adopted and effective before any paid family and medical leave that will be claimed for the credit is taken. A one‑time transitional rule in 2018 allowed retroactive adoption. Future guidance could address whether any retroactive adoption is permitted (this was not addressed in IRS Notice 2026-28).
Employers claim the 45S credit on their annual federal income tax return for the taxable year in which the paid family and medical leave was taken (or, under the new premium method, the insurance premiums were paid). The prior version of the credit was claimed on IRS Form 8994, and changes to that form are presumed to be forthcoming.
