A tax credit that used to expire every few years and required painstaking payroll math just got simpler and permanent. Small businesses that offer paid family and medical leave can now calculate the credit based on the insurance premiums they already pay, instead of tracking wages for every individual leave episode.
The IRS released Notice 2026-28 on August 5, 2026, spelling out how the new “premium method” works alongside the traditional wage-based approach. The guidance follows last year’s Working Families Tax Cuts legislation, which made the Section 45S employer credit for Paid Family and Medical Leave (PFML) permanent and broadened who qualifies.
What the credit is worth
Eligible employers can claim a general business tax credit equal to 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave per year. The percentage scales up from the 12.5% floor as the share of wages paid during leave rises above 50% of an employee’s normal pay.
Under the new premium method, businesses that buy PFML insurance policies can base the credit on premiums paid or incurred rather than tracking actual wages during each leave period. As the Current Federal Tax Developments analysis noted, this is “a significant administrative simplification” because it removes the need for rigorous tracking of individual leave instances.
Who qualifies now
The law lowered the eligibility bar. Employers can now claim the credit for workers with just 6 months of service, down from one year, and for part-time employees who work at least 20 hours per week. Employers can use both the wage method and the premium method on a single return, but they cannot double-count the same instance of leave.
One important catch for businesses in states with mandatory paid leave programs. Leave provided under state or local requirements can count toward meeting federal eligibility thresholds, but it generally cannot be included in the credit calculation itself.
To claim the credit, businesses need a written PFML policy that provides at least two weeks of paid leave annually (prorated for part-timers) at no less than 50% of normal wages. Employers must ensure that policy is compliant during 2026, the first full year the expanded rules are in effect.
Treasury Secretary Scott Bessent said the guidance “provides employers with the clarity they need to claim the enhanced credit.” The IRS has requested public comments on Notice 2026-28 by October 16, 2026, and proposed regulations are expected to follow. Small business owners should work with a tax advisor now to review their leave policies and decide whether the wage method, premium method, or a combination will put the most money back in their pocket before filing season.
