2. The 2026 credit has two calculation methods<\/h3>\n
You can now choose between the wage method and the premium method. The method changes what amount forms the base of the credit.<\/p>\n
![\"Payroll](\"https:\/\/cdn.marblism.com\/2W2TUm2dU4x.webp\")
<\/p>\n
The wage method<\/h4>\n
Under the wage method, the credit is based on wages actually paid to qualifying employees while they are on family and medical leave.<\/p>\n
The wages must meet the Section 45S requirements. Qualifying wages are wages subject to FUTA under section 3306(b), determined without regard to the $7,000 FUTA wage limitation.<\/p>\n
For example, an employer does not stop evaluating qualifying wages simply because the employee\u2019s wages exceed the FUTA wage limitation. The Section 45S wage definition uses FUTA-subject wages without applying that limitation.<\/p>\n
The premium method<\/h4>\n
Under the premium method, the credit is based on premiums paid or incurred for a PFML insurance policy.<\/p>\n
The rate of payment determination under this method is made without regard to whether any qualifying employees were actually on leave during the year. That means the method focuses on the qualifying coverage and the premium paid or incurred: not only on whether leave occurred during the taxable year.<\/p>\n
The premium must fund creditable coverage. A premium portion connected to noncreditable leave, nonqualifying employees, or leave required by state or local law is not creditable coverage.<\/p>\n
You may use both methods: but not twice for the same leave<\/h4>\n
You may use the wage method for certain leave and the premium method for other leave.<\/p>\n
You may not double-claim the credit for the same instance of leave. If you claim a premium credit for coverage that funds benefits, you cannot also claim a wage credit for those same benefits. If benefits are partly funded by the premium and partly funded from the employer\u2019s general assets, the two methods may apply to their respective portions.<\/p>\n
Document the funding path before calculating the credit.<\/p>\n
3. The rate increases when pay exceeds 50%<\/h3>\n
The credit begins at 12.5% when the employer provides at least 50% wage replacement.<\/p>\n
The rate increases as the employer\u2019s payment rises above that 50% level. The increase is 0.25 percentage points for each percentage point above 50%, subject to the 25% cap.<\/p>\n
Illustrative calculation<\/h4>\n
Assume an employee earns $60,000 annually and takes eight weeks of qualifying leave. Assume the employer pays 60% of the employee\u2019s normal wages during those eight weeks.<\/p>\n
This example is illustrative only. It assumes the wages otherwise meet the Section 45S requirements and uses a simple 52-week annual wage calculation.<\/p>\n
- \n
- Annual wages: $60,000<\/li>\n
- Normal wages for eight weeks: $60,000 \u00f7 52 \u00d7 8 = $9,230.77<\/li>\n
- Paid leave at 60%: $9,230.77 \u00d7 60% = $5,538.46<\/li>\n
- Amount above the 50% baseline: 10 percentage points<\/li>\n
- Rate increase: 10 \u00d7 0.25 percentage points = 2.5 percentage points<\/li>\n
- Illustrative credit percentage: 12.5% + 2.5% = 15%<\/li>\n
- Illustrative credit: $5,538.46 \u00d7 15% = $830.77<\/li>\n<\/ul>\n
The calculation shows the key mechanic: paying 60% rather than 50% increases the applicable percentage from 12.5% to 15%.<\/p>\n
It does not establish eligibility. Your CPA or tax advisor must confirm the employee, leave, wage, policy, and credit requirements for your facts.<\/p>\n
4. Eligibility and policy requirements still matter<\/h3>\n
The 2026 expansion broadens the employee population an employer may elect to include.<\/p>\n
The statutory default remains one year of service. For 2026, employers may elect to reduce the service requirement from one year to six months. Qualifying employees must also be customarily employed at least 20 hours per week, and their compensation for the preceding year must not exceed 60% of the section 414(q)(1)(B) threshold\u2014approximately $96,000 for 2026 based on the 2025 threshold referenced in IRS guidance. Qualifying part-time employees receive a prorated amount of leave relative to the hours a comparable full-time employee is customarily employed.<\/p>\n
The written policy requirements remain central. Your policy must provide:<\/p>\n
- \n
- At least two weeks of paid family and medical leave annually for qualifying employees.<\/li>\n
- A rate of at least 50% of wages normally paid.<\/li>\n
- A prorated leave amount for qualifying part-time employees.<\/li>\n
- Non-interference and non-retaliation language for employees not covered by Title I of the Family and Medical Leave Act.<\/li>\n<\/ul>\n
The credit can only be claimed for leave taken after the written policy is in place.<\/p>\n
Qualifying leave purposes include:<\/p>\n
- \n
- Birth of a child and care for that child.<\/li>\n
- Placement of a child for adoption or foster care.<\/li>\n
- Care for the employee\u2019s spouse, child, or parent with a serious health condition.<\/li>\n
- The employee\u2019s own serious health condition.<\/li>\n
- A qualifying exigency related to a spouse, child, or parent on covered active duty in the Armed Forces.<\/li>\n
- Care for a covered servicemember who is the employee\u2019s spouse, child, parent, or next of kin.<\/li>\n<\/ul>\n
State and local leave requires careful separation. Leave required by state or local law: or paid for by a state or local government: counts toward eligibility for the federal credit, but not toward the credit calculation.<\/p>\n
Premiums for coverage of leave required by state or local law or paid by a state or local government are not creditable coverage.<\/p>\n
5. Payroll records and premium allocation need structure<\/h3>\n
The new premium method creates a records challenge. A policy may cover more than the credit can recognize.<\/p>\n
![\"Organized](\"https:\/\/cdn.marblism.com\/GI1JQQIwyrX.webp\")
<\/p>\nA blended premium is a policy premium that covers both creditable and noncreditable coverage. It can also cover qualifying and nonqualifying employees.<\/p>\n
You must allocate a blended premium between creditable and noncreditable coverage using a reasonable method that is:<\/p>\n
- \n
- Consistent with the policy terms.<\/li>\n
- Supported by contemporaneous records.<\/li>\n
- Based on objective criteria.<\/li>\n
- Applied consistently for the taxable year.<\/li>\n
- Applied consistently across the aggregated employer group.<\/li>\n<\/ul>\n
Choose the allocation method before year-end processing becomes urgent. Document the policy terms, covered employee groups, premium invoices, allocation calculation, and any changes during the year.<\/p>\n
You also need to protect against duplicate claims. Reconcile:<\/p>\n
- \n
- Employees covered by the written policy.<\/li>\n
- Employee service periods.<\/li>\n
- Customary weekly hours.<\/li>\n
- Leave dates and qualifying purposes.<\/li>\n
- Wages paid during leave.<\/li>\n
- Insurance premiums paid or incurred.<\/li>\n
- Portions of premiums assigned to creditable coverage.<\/li>\n
- Amounts funded by insurance versus general business assets.<\/li>\n<\/ul>\n
The credit also affects deductions. Section 280C(a) disallows a deduction for the portion of wages or premiums equal to the credit. Wages used for another general business credit cannot be reused for the Section 45S credit.<\/p>\n
Use the IRS Section 45S FAQs<\/a>{:target="_blank" rel="noopener"} and Publication 15<\/a>{:target="_blank" rel="noopener"} for related employer and payroll recordkeeping guidance.<\/p>\n
6. What Business Owners Should Do Now<\/h3>\n