Employers that offer Paid Family and Medical Leave (PFML) may have a new opportunity to reduce their federal tax liability.
Recent changes have made the federal Employer Credit for Paid Family and Medical Leave permanent, while also expanding which employees and employer-paid benefits may qualify.
Here’s what employers should know.
What Is the Paid Family and Medical Leave Tax Credit?
The federal Paid Family and Medical Leave Tax Credit, also known as the Section 45S credit, is available to eligible employers that provide qualifying paid family and medical leave.
Depending on the employer’s policy and the amount employees are paid while on leave, the credit can range from 12.5% to 25% of qualifying wages for up to 12 weeks of leave per employee each taxable year.
Qualifying leave can include time away from work for:
- The birth, adoption, or fostering of a child
- An employee’s own serious health condition
- Caring for a spouse, child, or parent with a serious health condition
- Certain circumstances involving a family member on active military duty
- Caring for a qualifying injured or seriously ill servicemember
What’s Changing in 2026?
The biggest change is that the tax credit is now permanent. Previously, employers faced uncertainty about whether the credit would continue beyond its scheduled expiration.
The rules have also been expanded in several important ways.
More employees may qualify. Employers can elect to include employees after six months of service instead of waiting a full year. The updated rules also address employees who customarily work at least 20 hours per week.
Employers have another way to calculate the credit. Beginning in 2026, employers may be able to calculate the credit based on qualifying premiums they pay for Paid Family and Medical Leave insurance instead of only wages paid while employees are on leave.
State and local leave rules can help with eligibility. Certain leave required by state or local law can now count when determining whether an employer provides enough leave to qualify for the federal credit. However, those state- or locally mandated amounts generally cannot be included when calculating the federal credit itself.
Two Ways Employers Can Claim the Credit
Under the updated rules, employers may have two methods available:
Wage-based method: The credit is calculated using qualifying wages paid while an employee is on Paid Family and Medical Leave.
Premium-based method: The credit is calculated using qualifying premiums the employer pays or incurs for a PFML insurance policy.
Employers may potentially use both methods for different leave arrangements, but they cannot claim both credits for the same instance of leave.
What Should Employers Do Next?
If your company offers paid family or medical leave, this is a good time to review your current leave policies.
The expanded rules could make the credit available to employers that previously did not qualify, particularly businesses with part-time employees or employers using insurance to fund their paid leave benefits.
Because eligibility and calculation requirements can become complicated, employers should work with a qualified tax professional to determine whether they qualify and how the credit should be calculated.
How ASAP Payroll Can Help
Paid leave affects more than employee benefits. It can also impact payroll records, wage calculations, reporting, and compliance.
ASAP Payroll helps employers manage payroll and workforce information in one place, giving businesses better access to the employee and payroll data they may need when administering leave programs and working with their tax advisors.
If you’re reviewing your payroll, HR, or leave processes for 2026, contact ASAP Payroll to learn how we can help simplify workforce management.