The Internal Revenue Service and the Treasury Department issued
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The tax credit was originally introduced under the Tax Cuts and Jobs Act of 2017 and later permanently extended last year under the OBBBA. Last year’s tax law, which Republicans have rebranded as the Working Families Tax Cuts, expanded eligibility and coverage for employers offering up to 12 weeks of paid family and medical leave benefits to their employees. Eligible employers can claim the credit, which is equal to a percentage of wages they pay to qualifying employees while they’re on family and medical leave, subject to certain conditions.
Employees can use the leave to recover from a serious health condition or to care for certain family members with serious health conditions.
The OBBBA also made several important improvements to the credit, including expanded eligibility and coverage. Employers can claim the credit for employees with six months of service and for part-time employees customarily working 20 hours or more per week. Employers can also claim the credit for insurance premiums to provide leave, or wages paid during leave. Employers can count leave provided under state or local mandates toward the eligibility for this federal tax credit, but not toward the credit calculation.
Starting in 2026, employers can claim the credit for premiums paid for paid family and medical leave insurance policies, in addition to wages paid during leave.
There are two methods for calculating the credit. The wage method is based on wages actually paid to qualifying employees during leave. The new premium method is based on insurance premiums paid by the employer for policies covering paid family and medical leave. Employers can elect either method, but not both for the same instance of leave. The premium method allows a credit for premiums funding benefits that would qualify under the wage method. Premiums for non-qualifying coverage (e.g., leave required by state law, non-qualifying employees) are not eligible. If a premium covers both qualifying and non-qualifying leave (a blended premium), employers need to allocate the premium using a reasonable, consistent and well-documented method.
To help employers apply the new premium-based method, the newly issued
The definition of a qualifying employee is now limited to those customarily employed for at least 20 hours per week, with an option to include employees after six months of employment.
The aggregation rules have been updated. All persons treated as a single employer under section 414(b) and (c) are considered one employer, with exceptions for substantial and legitimate business reasons. Leave required by state or local law or paid by state or local governments counts toward eligibility but not toward the credit amount.
Employers cannot deduct the portion of premiums or wages equal to the credit claimed under Section 45S of the Internal Revenue Code. Employers can rely on the guidance for taxable years beginning after Dec. 31, 2025, until proposed regulations are issued.
“Hardworking Americans should not have to choose between caring for a loved one and earning a paycheck,” said Treasury Secretary Scott Bessent in a statement Wednesday. “The Working Families Tax Cuts permanently expands the federal Paid Family and Medical Leave Tax Credit, giving businesses, especially small businesses, greater incentives to provide paid leave so workers can care for a newborn or other family member or recover from a serious illness without sacrificing their financial security. Today’s guidance provides employers with the clarity they need to claim the enhanced credit, supporting American workers, families, and businesses.”
“The permanent expansion of the credit encourages businesses to provide paid family and medical leave,” said IRS CEO Frank Bisignano in a statement. “The changes enacted by the Working Families Tax Cuts will make more employers eligible for the credit and give them more ways to offer this benefit to their workers.”
The Treasury and the IRS plan to propose forthcoming regulations to provide broader guidance to address the statute comprehensively and provide more certainty to taxpayers. They are also asking for comments on all aspects of the notice and any other issues regarding implementation of the amendments to section 45S of the Internal Revenue Code by the OBBBA that should be addressed in the forthcoming proposed regulations. They are seeking public comments on methods for allocating blended premiums; the application of the credit to voluntary state programs administered by private insurers; and what constitutes a substantial and legitimate business reason for not providing a written policy. Comments are due by Oct. 16, 2026, and can be submitted electronically or by mail. Complete instructions on submitting comments are included in the notice.
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