{"id":83,"date":"2026-09-18T10:01:17","date_gmt":"2026-09-18T17:01:17","guid":{"rendered":"https:\/\/blog.lunasiaccounting.com\/?p=83"},"modified":"2026-09-18T10:01:17","modified_gmt":"2026-09-18T17:01:17","slug":"the-paid-family-and-medical-leave-tax-credit-is-now-permanent-what-employers-should-know-for-2026","status":"publish","type":"post","link":"https:\/\/blog.lunasiaccounting.com\/?p=83","title":{"rendered":"The Paid Family and Medical Leave Tax Credit Is Now Permanent: What Employers Should Know for 2026"},"content":{"rendered":"<\/p>\n<p><img decoding=\"async\" src=\"https:\/\/cdn.marblism.com\/F625D9DraU-.webp\" alt=\"Business owner and HR professional reviewing a paid-leave policy at a modern office desk\" style=\"max-width: 100%; height: auto;\"><\/p>\n<p>A fault line is a hidden boundary beneath the surface. You may not see it every day, but it shapes what happens above it.<\/p>\n<p>Paid family and medical leave works similarly. The policy may sit in an employee handbook, while the financial impact runs through payroll, insurance premiums, wage records, and tax reporting. In 2026, the rules shift again: the federal credit under Internal Revenue Code section 45S is now permanent and offers employers two ways to calculate qualifying costs.<\/p>\n<p>The credit can support employers that provide paid leave, but eligibility and documentation still matter. Here is what changed and what your business should review now.<\/p>\n<h3>1. The section 45S credit is now permanent<\/h3>\n<p>The One Big Beautiful Bill Act, or OBBBA, <strong>Pub. L. 119-21<\/strong>, enacted July 4, 2025, made the section 45S paid family and medical leave tax credit permanent.<\/p>\n<p>For calendar-year employers, the expanded rules apply beginning with the 2026 tax year. The IRS describes the credit in <a href=\"https:\/\/www.irs.gov\/newsroom\/what-employers-need-to-know-about-the-enhancements-to-the-paid-family-and-medical-leave-tax-credit\">Tax Tip 2026-64<\/a> and its <a href=\"https:\/\/www.irs.gov\/newsroom\/treasury-irs-issue-guidance-on-the-permanent-expansion-of-paid-family-and-medical-leave-under-the-working-families-tax-cuts\">August 5, 2026 news release<\/a>.<\/p>\n<p>The credit is available for qualifying paid family and medical leave provided for up to 12 weeks per employee per taxable year. The qualifying purposes are generally consistent with Family and Medical Leave Act purposes:<\/p>\n<ul>\n<li>Birth or placement of a child through adoption or foster care.<\/li>\n<li>The employee\u2019s own serious health condition.<\/li>\n<li>Care for a spouse, child, or parent with a serious health condition.<\/li>\n<li>A qualifying military exigency.<\/li>\n<li>Care for a covered servicemember.<\/li>\n<\/ul>\n<p>The credit begins at <strong>12.5%<\/strong> when an employer provides at least 50% wage replacement. It increases by <strong>0.25 percentage points for each percentage point of wage replacement above 50%<\/strong>, reaching a maximum of <strong>25% at 100% wage replacement<\/strong>.<\/p>\n<p>This is an employer tax credit: not a reimbursement of the entire leave cost. Your payroll and tax records must support the amount claimed.<\/p>\n<h3>2. Eligibility is broader, but the service election matters<\/h3>\n<p>The 2026 rules expand coverage to certain part-time employees and give employers a new service-period election.<\/p>\n<p>The statutory default remains <strong>one year of service<\/strong>. The six-month period is an employer election: not automatic.<\/p>\n<p>For 2026, employers may <strong>ELECT<\/strong> 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 prior-year compensation must not exceed 60% of the section 414(q)(1)(B) threshold: approximately <strong>$96,000 for 2026<\/strong>. Part-time employees receive a prorated amount of paid leave relative to full-time hours.<\/p>\n<p>That election should be made deliberately. Review how your policy defines eligibility, how your payroll system tracks service dates, and whether your employee population meets the hours and compensation requirements.<\/p>\n<p>A written policy is also required. The policy must provide:<\/p>\n<ul>\n<li>At least two weeks of paid family and medical leave annually.<\/li>\n<li>A minimum of 50% of normal wages during the leave.<\/li>\n<li>A prorated amount for part-time employees.<\/li>\n<li>Non-interference and non-retaliation language for employees who are not covered by FMLA Title I.<\/li>\n<\/ul>\n<p>A policy that promises paid leave informally, or only handles leave case by case, may not provide the documentation structure needed for the credit.<\/p>\n<h3>3. Employers can choose the wage method or premium method<\/h3>\n<p>Beginning in 2026, employers may elect between two methods.<\/p>\n<p>The <strong>wage method<\/strong> calculates the credit using qualifying wages paid to employees during eligible leave.<\/p>\n<p>The new <strong>premium method<\/strong> calculates the credit using qualifying premiums paid or incurred for a PFML insurance policy. This expands the credit beyond situations where the employer directly pays wages during leave.<\/p>\n<p>Employers may use both methods in the same tax year. However, the same instance of leave cannot be claimed twice.<\/p>\n<p>For example, if a PFML insurance premium funds benefits for a particular leave period and the employer claims the premium credit, the employer generally cannot also claim a wage credit for those same benefits. If part of the leave benefit is funded through insurance and part is paid from the employer\u2019s general assets, the allocation must be handled carefully.<\/p>\n<p>The IRS provides reliance guidance in <a href=\"https:\/\/www.irs.gov\/pub\/irs-drop\/n-26-28.pdf\">Notice 2026-28<\/a>. Employers may rely on the notice for tax years beginning after December 31, 2025, until proposed regulations are issued. The guidance may change when proposed or final regulations are published, so check the current status on <a href=\"https:\/\/www.irs.gov\/newsroom\/irs-tax-tips\">IRS.gov<\/a> before filing.<\/p>\n<h3>4. State leave and blended premiums require careful records<\/h3>\n<p>State- or local-mandated leave, and leave paid by a state or local government, can count toward determining whether an employer meets the eligibility requirements. But that leave does <strong>not<\/strong> count toward the federal credit calculation.<\/p>\n<p>The same distinction applies to premiums. Premiums that fund state-mandated or state-paid leave are not creditable coverage under the premium method.<\/p>\n<p>This creates an important accounting issue for employers with mixed leave arrangements. Do not assume that every paid-leave premium qualifies simply because it appears on an insurance invoice.<\/p>\n<p>A blended premium may cover several types of benefits, such as:<\/p>\n<ul>\n<li>Qualifying PFML.<\/li>\n<li>Other forms of leave.<\/li>\n<li>Employees who qualify under section 45S.<\/li>\n<li>Employees who do not meet the qualifying employee requirements.<\/li>\n<\/ul>\n<p>The employer must allocate the blended premium between creditable and noncreditable coverage using a reasonable method. The method must be consistent with the policy terms, use objective criteria, and be supported by contemporaneous records.<\/p>\n<p><strong>Action plan:<\/strong><\/p>\n<ul>\n<li>Obtain the full policy and premium schedule.<\/li>\n<li>Identify which benefits are potentially creditable.<\/li>\n<li>Document the allocation method before filing.<\/li>\n<li>Apply the method consistently during the taxable year.<\/li>\n<li>Retain supporting records with the payroll and tax workpapers.<\/li>\n<\/ul>\n<h3>5. Simplified example: eight weeks of full-pay leave<\/h3>\n<p>Consider a small business with 12 employees. One qualifying employee takes eight weeks of paid family leave at full wage replacement.<\/p>\n<p>Assume the employee\u2019s normal weekly wages are $1,250.<\/p>\n<p>The simplified calculation would be:<\/p>\n<ul>\n<li>Eight weeks \u00d7 $1,250 = <strong>$10,000 of qualifying wages<\/strong>.<\/li>\n<li>Full wage replacement supports the maximum conceptual rate of <strong>25%<\/strong>.<\/li>\n<li>$10,000 \u00d7 25% = <strong>$2,500 conceptual credit amount<\/strong>.<\/li>\n<\/ul>\n<p>This example assumes the wages are otherwise qualifying, the employee meets the applicable service, hours, and compensation requirements, and the employer\u2019s written policy satisfies the section 45S requirements.<\/p>\n<p>It is only a simplified illustration. The actual credit computation and eligibility determination belong with the employer\u2019s CPA or tax advisor: not LunaSi. The business must also consider recordkeeping, other credits, the selected method, and the interaction between wages and premiums.<\/p>\n<p>Section 280C(a) limits deductions for the wages or premiums equal to the credit. In addition, wages used to claim another general business credit cannot be used again for the section 45S credit. Your tax advisor should coordinate the credit with the rest of the business\u2019s tax return.<\/p>\n<p><img decoding=\"async\" src=\"https:\/\/cdn.marblism.com\/09bJ6OtX5hr.webp\" alt=\"Organized payroll documents, wage records, and leave records on a finance manager\u2019s desk\" style=\"max-width: 100%; height: auto;\"><\/p>\n<h3>What Business Owners Should Do Now<\/h3>\n<p>Use this checklist before claiming the credit for 2026:<\/p>\n<ul>\n<li><strong>Confirm your written policy.<\/strong> Verify that it provides at least two weeks of paid PFML annually, at least 50% of normal wages, and the required non-interference and non-retaliation language.<\/li>\n<li><strong>Review the service-period election.<\/strong> Decide whether your business will elect the six-month service requirement instead of the statutory one-year default.<\/li>\n<li><strong>Check employee limits.<\/strong> Confirm that qualifying employees are customarily employed at least 20 hours per week and that prior-year compensation does not exceed 60% of the section 414(q)(1)(B) threshold: approximately $96,000 for 2026.<\/li>\n<li><strong>Review part-time treatment.<\/strong> Make sure paid leave is prorated relative to full-time hours.<\/li>\n<li><strong>Choose the calculation method.<\/strong> Determine whether the wage method, premium method, or both methods fit your leave program.<\/li>\n<li><strong>Review state interactions.<\/strong> Separate state- or local-mandated and state-paid leave from amounts used in the federal credit calculation.<\/li>\n<li><strong>Document payroll activity.<\/strong> Preserve wages, hours, service dates, leave dates, wage-replacement percentages, and payment records.<\/li>\n<li><strong>Document blended premiums.<\/strong> Use a reasonable, consistently applied allocation method supported by contemporaneous records.<\/li>\n<li><strong>Avoid double claims.<\/strong> Do not claim both methods for the same instance of leave.<\/li>\n<li><strong>Coordinate with your CPA.<\/strong> Have your tax advisor determine eligibility, calculate the credit, and address section 280C and other general business credit interactions.<\/li>\n<li><strong>Track the guidance deadline.<\/strong> Written comments on Notice 2026-28 are due on or before <strong>October 16, 2026<\/strong>. The notice explains how comments may be submitted through <a href=\"https:\/\/www.regulations.gov\/\">Regulations.gov<\/a>.<\/li>\n<\/ul>\n<p><img decoding=\"async\" src=\"https:\/\/cdn.marblism.com\/UZ1lHOTd3Er.webp\" alt=\"Business owner and payroll manager reviewing IRS guidance and a paid-leave credit checklist\" style=\"max-width: 100%; height: auto;\"><\/p>\n<h3>Conclusion<\/h3>\n<p>The permanent section 45S credit gives employers more certainty and, beginning in 2026, a choice between wage-based and premium-based calculations. The opportunity is practical, but the records must match the policy, payroll, insurance arrangement, and tax return.<\/p>\n<p>LunaSi Accounting, LLC can support the operational side through bookkeeping, payroll support and reconciliation, month-end close, and financial reporting and documentation. Credit eligibility and computation remain outside LunaSi\u2019s scope and should be handled with your CPA or qualified tax advisor.<\/p>\n<h3>Getting Started<\/h3>\n<p>Start with one review: compare your written leave policy to your payroll records and insurance documents. Then coordinate with your CPA before claiming the credit so your business moves into 2026 with organized records, clear responsibilities, and reliable reporting.<\/p>\n<p>18.09.2026<\/p>\n<p>This content is for general informational purposes and is not legal, tax, or accounting advice. Consult a qualified professional for your specific situation.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A fault line is a hidden boundary beneath the surface. You may not see it every day, but it shapes [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":82,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[1],"tags":[],"class_list":["post-83","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/posts\/83","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=83"}],"version-history":[{"count":0,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/posts\/83\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=\/wp\/v2\/media\/82"}],"wp:attachment":[{"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=83"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=83"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lunasiaccounting.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=83"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}