United States · Workforce and tax planning · BGA owner guide

Paid family and medical leave tax credit in 2026: wage or premium method?

By BGA Editorial Desk · Published 2026-10-28 · Sources checked 2026-10-28

A decision guide to the updated Section 45S employer credit, including eligibility screens, wage-versus-premium tradeoffs and records to assemble before filing.

The 2026 change creates a real choice, not an automatic credit

Beginning in 2026, an eligible employer may calculate the federal Section 45S credit using qualifying wages paid during family and medical leave or qualifying premiums paid for an insurance policy that funds that leave. The IRS says the credit is now permanent and can range from 12.5% to 25% under the wage method, subject to the rules. It is a general business tax credit, not a reimbursement deposited when an employer adopts a leave policy.

The first owner decision is therefore not simply whether paid leave is valuable. It is whether the employer, its written policy, the employees and the payments fit the federal credit, and whether the records support a wage, premium or permitted mixed approach. BGA has not reviewed any reader's policy or tax return. Use this guide to organize a discussion with a qualified tax professional and benefits adviser before relying on a credit in a budget.

Run an eligibility screen before comparing methods

The IRS's August 2026 overview says the updated rules can include employees with six months of service and part-time employees customarily working at least 20 hours per week. It also says the credit can cover up to 12 weeks of qualifying family and medical leave. Those summary points do not replace the complete requirements, including a compliant written policy and rules governing which leave, employees, wages and premiums qualify.

Ask four threshold questions: Is there a written policy that specifically provides qualifying family and medical leave? Does it cover the qualifying employees the rules require it to cover? Does the payment rate and duration meet the applicable conditions? Can payroll, insurer and leave records connect each claimed amount to qualifying coverage or leave? A general paid-time-off bank that can be used for vacation or ordinary personal reasons should not be treated as qualifying family and medical leave without professional review.

State and local leave rules require special care. The IRS says mandated or government-paid leave can count when testing whether the employer provides enough leave to be eligible, but the mandated or government-paid portion does not count when calculating the federal credit. Employers in D.C., Maryland, Delaware and other jurisdictions should separate the federal calculation from state and local compliance instead of assuming one worksheet answers both.

Choose the wage method when actual leave payments are the clearest record

Under the wage method, the calculation starts with qualifying wages actually paid while a qualifying employee is on qualifying family and medical leave. This can be easier to trace when payroll clearly identifies the employee, leave dates, ordinary wage rate, leave rate and employer-funded amount. It can also match the economics of a business that self-funds leave rather than buying a separate policy.

For a simplified illustration only, suppose an employer determines with its adviser that $20,000 of wages meet every Section 45S requirement and that a 12.5% rate applies. The arithmetic would be $20,000 × 0.125 = $2,500. That is not a credit estimate for a real company: the qualifying amount, percentage, deduction adjustment, general-business-credit limits and return treatment still require verification. Do not count ordinary sick time, state-funded benefits or another credit's wage base twice.

Consider the premium method when insured coverage is the better unit of proof

The new premium method uses qualifying premiums paid or incurred for an insurance policy providing qualifying paid family and medical leave. Notice 2026-28 says eligibility does not depend on a qualifying employee actually taking leave during that tax year. That feature may matter to a small employer paying for coverage even when no claim occurs, but only the portion funding creditable coverage belongs in the calculation.

A policy may bundle qualifying leave with nonqualifying leave or cover both qualifying and nonqualifying employees. The Notice calls that a blended premium and requires allocation. It permits a reasonable method consistent with policy terms, supported by contemporaneous records, based on objective criteria and applied consistently for the year and across entities treated as a single employer. Ask the carrier or broker for a coverage and premium breakdown; a total invoice alone may not prove the qualifying portion.

The Notice also bars double counting. An employer may use the wage method for some leave and the premium method for other leave, but it cannot claim both methods for the same funded benefit. If an insurer funds part of a leave payment and the employer pays the rest from general assets, the allocation must preserve that distinction. Have the adviser document the election and the connection between premiums, reimbursements and payroll.

Build a credit file before tax preparation begins

Keep the adopted policy and effective date, employee eligibility data, customary weekly hours, service dates, leave requests and approved purposes, payroll detail, insurance contracts, premium invoices and carrier explanations in one controlled file. Add the allocation method for any blended premium and evidence that it was applied consistently. Record which amounts came from state or local programs and which came from the employer or insurer.

Reconcile the file to the general ledger and payroll returns, then create a one-page decision memo: method chosen, qualifying amount, tentative rate, exclusions, unresolved questions and the professional who reviewed the treatment. The IRS identifies Form 8994 as the form used to figure the credit, but current forms and instructions can change. Confirm the revision that applies to the taxable year instead of copying an older FAQ or worksheet.

A useful final question is whether the tax benefit changes the business decision or merely improves the economics of a sound leave plan. Paid leave affects staffing, coverage, retention and cash timing. Model those operating effects separately from the tax credit, then decide what the company can sustain even if the final allowed credit differs from the early estimate.

What remains unresolved

Notice 2026-28 states that Treasury and the IRS intend to issue proposed regulations and that taxpayers may rely on the Notice for taxable years beginning after December 31, 2025 and before proposed regulations are issued. The IRS's older Section 45S FAQ page also displays a warning that recent statutory changes are not yet reflected throughout that page. Owners should treat the 2026 Tax Tip and Notice as the current starting point and check for later regulations, forms and instructions at filing time.

This article provides general business information, not tax, legal or benefits advice. The next step is to give a qualified adviser the written policy, employee census, payroll detail and insurance documents—not just ask whether the company 'offers paid leave.' A defensible credit begins with records that show exactly what was promised, paid, insured and excluded.