The Paid Leave Credit Most Owners Miss

If you run a 10-person company and one employee earning $50,000 a year takes six weeks of paid leave at full salary, the federal government will hand you back roughly $1,442. That is 25% of the roughly $5,769 you paid that employee while they were out. If two or three employees use leave in the same year, the credit stacks. For a small team, that is real money sitting on a tax form most founders have never filed.

The credit comes from Section 45S of the tax code. It ranges from 12.5% to 25% of qualifying wages, depending on how much of an employee’s normal pay you replace during leave. It caps at 12 weeks of leave per employee per tax year. And as of August 2026, the IRS expanded how you can claim it.

The credit does not make paid leave free. It makes it cheaper. And many small businesses already offer some version of paid leave without knowing they qualify. If that sounds like you, keep reading.

How Much You Get Back Depends on How Much You Pay

Think of the credit rate like a volume discount in reverse. The more of an employee’s normal pay you replace while they are on leave, the higher the percentage the IRS gives back. If you pay 50% of their usual wages during leave, you get the minimum credit rate of 12.5%. Each percentage point of wage replacement above 50% adds 0.25% to your credit rate. Pay 100% of wages, and you hit the maximum: 25%. The IRS recently simplified the path to claiming this credit, which makes the math worth running for more businesses than before.

Most small employers who offer paid leave at all tend to pay full salary for a few weeks. If that describes your policy, you are already at the top credit rate without changing anything.

Two Ways to Claim the Credit Starting in 2026

Before 2026, there was only one way to claim this credit. You paid the employee during their leave, and you calculated the credit based on those wages. That still works. It is called the wage method.

The wage method

You pay the employee directly while they are on leave. You claim the credit based on what you paid them. This is straightforward if you self-fund your leave policy.

The premium method

Starting in 2026, you can also claim the credit based on premiums you pay for a qualifying paid family and medical leave (PFML) insurance policy. This is the new option from Notice 2026-28, issued by Treasury and the IRS on August 5, 2026. KPMG flagged this as the biggest operational change in the new guidance.

You do not need to pick a method today. But you do need to know both exist before your next tax planning conversation.

Five Things That Have to Be True Before You File

The credit is available to employers of any size, and Treasury explicitly designed the expanded rules with small businesses in mind. But you have to meet five conditions. Here is how to screen yourself quickly.

1. You have a written paid leave policy. Not a verbal agreement, not an informal practice. A document.
2. Your policy offers at least two weeks of paid leave to full-time employees.
3. The leave pay replaces at least 50% of the employee’s normal wages. Anything below 50% does not qualify at all.
4. Employees who have worked for you less than one year still get leave on a pro-rata basis. You cannot exclude new hires entirely.
5. Part-time employees now appear to be included under the expanded rules, but the exact details are in the notice text. Confirm this with your CPA before filing.

Now here is where most small businesses trip up. Picture a founder with eight employees. A team member has a baby, and the founder says, “Take two weeks off. We will keep paying you.” That is paid leave in practice. But there is no written policy on file. Without that document, the founder spent the money and got zero credit. If your leave policy lives in your head instead of on paper, you are paying for the benefit but forfeiting the tax break.

• You cannot double-dip: wages you claim under this credit cannot also be used for other employment tax credits like the Work Opportunity Tax Credit (WOTC).
• The IRS is accepting public comments on the notice until October 16, 2026, so some details could still shift. BakerHostetler flagged this deadline as a reason to treat the current rules as active guidance, not necessarily the final word.

If you are planning to hire in the coming months, getting a written leave policy in place now could mean every new employee’s future leave becomes credit-eligible from day one.

What This Looks Like for a 10-Person Agency

Say you run a 10-person marketing agency. Average salary is $55,000. You offer four weeks of paid leave at full wages. In a given year, two employees each take four weeks.

Each employee’s weekly pay is about $1,058. Four weeks of leave costs you roughly $4,231 per employee. At 100% wage replacement, you get the 25% credit rate. That is about $1,058 back per employee, or roughly $2,115 total for the year. You claim it as a general business credit on Form 8994. A general business credit is a type of tax credit that reduces the taxes your company owes, dollar for dollar, reported on your business return.

Now change one variable. Say you only replace 60% of each employee’s wages during leave. Your credit rate drops to about 15%. The leave wages are lower, and the percentage is lower. Your total credit falls to somewhere around $760 for both employees combined.

As the chart above shows, the difference between those two scenarios is meaningful for a small firm. The credit does not eliminate the cost of leave. But at the higher replacement rate, you recover a quarter of what you spent. Actual amounts depend on your specific wages, eligibility, and documentation. If you are already tracking other employer tax credits, Form 8994 fits into the same filing workflow.

Three Questions to Send Your CPA This Week

You do not need to become a tax expert on Section 45S. You need to start one conversation before Q4 planning kicks in. Here are the three questions worth sending in an email to your CPA or payroll provider this week.

1. Does our current paid leave policy meet Section 45S requirements? If not, what specific changes do we need to make?
2. Should we claim the credit using the wage method or the new premium method?
3. What records do we need to keep throughout the year to support a Form 8994 claim?

If you use a payroll service like Gusto, ADP, or Paychex, ask them directly whether they are building support for this credit into their platform. Some may already be tracking the data you need. You can also point your CPA to the full IRS notice so they are working from the source, not a summary. And if your business involves tipped workers, the way you classify tips versus service charges could affect how you calculate qualifying wages, so raise that too.

The Rules Are Clear Enough to Act On Now

The IRS issued Notice 2026-28 on August 5, 2026. Public comments are due by October 16, 2026, which means some implementation details could still be adjusted in final regulations. But the underlying credit is permanent under the statute. The core mechanics, the rates, the 12-week cap, and the new premium method are all live and usable for 2026 tax returns. Review your leave policy now, send those three questions to your CPA, and get your documentation in order while there is still time to shape this year’s filing.