The IRS Just Made a Paid Leave Tax Credit Permanent — Here's What It's Worth

A Tax Break Worth Up to 25% of Wages Just Became Permanent

On August 5, 2026, the Treasury Department and the IRS released Notice 2026-28, spelling out how small businesses can claim a tax credit worth up to a quarter of what they pay employees on family and medical leave. The credit, known as Section 45S, has existed in some form since 2018 — but it used to expire and get renewed by Congress every couple of years, which made it risky to build into long-term hiring or benefits plans. Under the Working Families Tax Cuts law, the credit is now permanent, and the rules around who qualifies just got noticeably more generous.

If you run a business with W-2 employees and you've held off on offering paid leave because you weren't sure the tax benefit would still exist next year, this notice answers that question. It also opens the credit to more of your workforce than before, and it gives you a second way to calculate it.

What the Credit Is Actually Worth

Employers who offer qualifying paid family and medical leave can claim a general business tax credit equal to 12.5% to 25% of wages paid during that leave, for up to 12 weeks per employee per year. The exact percentage depends on how much of an employee's normal wages your leave policy replaces: a policy that pays 50% of wages during leave gets the base 12.5% credit, and the rate climbs one percentage point for every point above 50%, topping out at 25% for a policy that fully replaces wages.

For a business with a handful of employees earning modest salaries, that can mean a credit worth several thousand dollars a year — money that comes directly off your tax bill, not just off your taxable income. If you already offer some form of paid leave and haven't been claiming the credit, it's worth revisiting with whoever handles your profit and loss statement, since this changes what leave actually costs you on paper.

Who Qualifies Now That Didn't Before

The eligibility rules were a common reason small employers skipped this credit in the past. Notice 2026-28 confirms two expansions that matter for smaller shops in particular:

• Employees only need six months of service to count, down from a full year previously — useful if you have seasonal hiring patterns or higher turnover in year one.
• Part-time employees working at least 20 hours a week are now eligible, where the credit used to effectively require full-time status.

That second change is significant for retail, restaurant, salon, and other service businesses that lean on part-time staff. It means a leave policy you extend to your part-timers can now generate the same tax credit as one covering full-timers, as long as the wage-replacement percentage and other requirements are met.

Two Ways to Calculate the Credit: Wages or Insurance Premiums

Before this guidance, the only way to claim the credit was the "wage method" — tracking actual wages paid to each employee during actual leave, then applying the formula. That requires real recordkeeping discipline: you need to document who was on leave, for how long, and what they were paid.

Notice 2026-28 formally rolls out a second option starting in 2026: the "premium method." If you buy a private insurance policy that covers paid family and medical leave for your employees, you can instead base the credit on the premiums you pay for that policy — regardless of whether any employee actually took leave that year. For a small business that would rather pay a predictable annual premium than administer a leave-tracking system in-house, this is the simpler path. You can't claim both methods for the same instance of leave, but the notice allows employers to use different methods for different situations.

If you're structured as an S corporation or partnership, how this credit flows through to your personal return depends on your entity setup — something worth checking against the differences laid out in our LLC vs. S corp comparison if you haven't reviewed your structure recently.

The Catch: You Have to Give Up a Deduction

The credit isn't free money on top of your normal deductions. If you claim the Section 45S credit, you're required to reduce your deduction for employee compensation by the amount of the credit claimed. In practice, this means you should run the math both ways — credit versus straight deduction — before assuming the credit is automatically the better move, particularly if your business is in a lower tax bracket where the deduction might be worth more than the credit.

This is a case where it pays to loop in a tax preparer or accountant rather than guess. The rules for allocating premiums under the new premium method, in particular, have enough moving parts that the IRS notice runs to dozens of pages of technical guidance.

What To Do Before Your Next Tax Filing

A few concrete steps make sense now that the credit is permanent and the rules are clearer:

• If you already offer paid family or medical leave, check whether your policy's wage-replacement percentage and duration meet the Section 45S requirements — small tweaks to an existing policy could qualify you for the credit where you weren't eligible before.
• If you don't currently offer paid leave, price out what a qualifying policy would cost against the credit you'd receive, especially if you employ part-time workers who are newly eligible.
• Confirm your written leave policy is documented — the IRS generally requires a written policy in place before leave is taken for the leave to qualify.
• Talk to your payroll provider or insurance broker about whether the premium method might be simpler for your business than tracking wages during leave.

Employers can rely on Notice 2026-28 for taxable years beginning after December 31, 2025, and before the IRS issues formal proposed regulations — meaning the guidance is usable now, even though it isn't final law yet. For a business that's been on the fence about paid leave benefits, the combination of permanence and expanded eligibility removes two of the biggest reasons to wait.

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