Paid Family and Medical Leave Tax Credit Expands: What Employers Need to Know in 2026

Published On: August 10, 2026Categories: PayrollTags: Payroll

Paid family and medical leave can help employees manage important life events while maintaining financial stability. For employers, offering paid leave can also create an opportunity to access a federal tax credit.

In 2026, the Working Families Tax Cuts permanently expands the federal Paid Family and Medical Leave Tax Credit under Section 45S, potentially making the credit available to more employers and expanding the ways qualifying paid leave may be provided.

For businesses reviewing their employee benefits, payroll processes, and leave programs for 2026, these changes are worth understanding.

What Is the Paid Family and Medical Leave Tax Credit?

The Paid Family and Medical Leave Tax Credit is a federal general business tax credit that may be available to eligible employers that provide qualifying paid family and medical leave to employees. Beginning in 2026, the Working Families Tax Cuts permanently expands the credit and allows additional employers and certain paid leave arrangements to qualify.

The IRS provides additional information about the Section 45S credit through its Section 45S Employer Credit for Paid Family and Medical Leave FAQs IRS Section 45S Employer Credit for Paid Family and Medical Leave FAQs.

Key Takeaways for Employers

The Working Families Tax Cuts permanently expands the federal Paid Family and Medical Leave Tax Credit.
More employers may qualify for the credit under the expanded rules.
Certain employees with at least six months of service may now be relevant to eligibility.
Certain part-time employees who customarily work at least 20 hours per week may qualify under the expanded rules.
Beginning in 2026, certain premiums paid for paid family and medical leave insurance may be eligible for the credit.
Certain leave provided under state or local mandates can count when determining eligibility, although it generally cannot be included when calculating the amount of the federal credit.
The credit can range from 12.5 percent to 25 percent of qualifying wages.
Employers should review their leave programs, payroll processes, benefits arrangements, and applicable state requirements.
Additional Treasury and IRS guidance is expected.

Who Should Review the 2026 Paid Family and Medical Leave Tax Credit?

The expanded credit may be particularly relevant to:

Small businesses.
Midsize businesses.
Employers that already provide paid family and medical leave.
Employers considering adding paid family and medical leave.
Employers that use insurance to provide paid family and medical leave.
Employers with part-time employees.
Employers operating in states with paid family and medical leave requirements.
Employers reviewing their employee benefits strategy for 2026.

Even employers that previously determined they did not qualify should consider reviewing the expanded rules with their tax professional.

What Should Employers Do Now?

The 2026 changes give employers an opportunity to review their current paid leave strategy.

Review Your Existing Leave Program

Determine whether your organization currently provides paid family and medical leave.

Review how much leave is available, which employees are eligible, how employees are paid during leave, and how the benefit is documented.

Review Employee Eligibility

Review your workforce to determine whether the expanded eligibility rules may affect your organization.

Pay particular attention to employees who have reached six months of service and qualifying part-time employees who customarily work 20 hours or more per week.

Evaluate Insurance Options

If your company provides paid family and medical leave through an insurance arrangement, review whether the premium-based provisions may apply.

This may be an important consideration during benefits planning and renewal discussions.

Review State and Local Requirements

Identify the paid family and medical leave requirements that apply wherever your employees work.

Businesses with employees in multiple states should be especially careful because requirements can vary by jurisdiction.

Review Payroll Processes

Paid leave can affect payroll calculations, employee records, reporting, and tax documentation.

Employers should make sure their payroll processes can accurately track qualifying leave and wages.

Coordinate HR, Payroll, Benefits, and Tax Planning

The credit touches several areas of an employer’s operations.

HR teams may manage leave policies and employee eligibility. Payroll teams may track qualifying wages and leave periods. Benefits teams may evaluate insurance arrangements. Tax professionals may determine eligibility and calculate the credit.

Coordinating these functions can help employers maintain accurate records and make informed decisions.

Why Payroll Matters When Managing Paid Leave

Paid family and medical leave is not only an HR issue.

Payroll plays an important role in accurately recording leave, calculating employee pay, maintaining wage information, and supporting the documentation employers may need when evaluating the tax credit.

A payroll system that integrates with HR processes can help employers maintain more consistent employee information and reduce the risk of disconnected records.

For businesses reviewing their paid leave programs, payroll should be part of the conversation from the beginning rather than an administrative step handled later.

Frequently Asked Questions About the Paid Family and Medical Leave Tax Credit

What is the Paid Family and Medical Leave Tax Credit?

The Paid Family and Medical Leave Tax Credit is a federal general business tax credit for eligible employers that provide qualifying paid family and medical leave to employees. The Working Families Tax Cuts permanently expands the credit beginning in 2026.

How much is the Paid Family and Medical Leave Tax Credit?

The credit can range from 12.5 percent to 25 percent of qualifying wages paid during eligible family and medical leave, subject to applicable requirements and limitations.

How many weeks of leave can be used for the credit?

The credit can generally apply to up to 12 weeks of qualifying family and medical leave per employee during a taxable year.

Can part-time employees qualify for the credit?

Yes. The Working Families Tax Cuts expands eligibility to certain part-time employees who customarily work 20 hours or more per week.

How long must an employee work before the employer can claim the credit?

Under the expanded 2026 rules, certain employees with at least six months of service may qualify. Employers should review the current IRS guidance and forthcoming regulations for the specific requirements that apply.

Does vacation qualify for the Paid Family and Medical Leave Tax Credit?

Generally, vacation leave does not qualify when it is not specifically designated for a qualifying family or medical purpose.

Does sick leave qualify for the Paid Family and Medical Leave Tax Credit?

Not necessarily. Paid sick leave that is not specifically designated for a qualifying family or medical purpose generally does not qualify for the Section 45S credit.

What form do employers use to calculate the credit?

Eligible employers use Form 8994, Employer Credit for Paid Family and Medical Leave, to calculate the credit. Employers should review the current form and IRS instructions for applicable requirements.

Is the Paid Family and Medical Leave Tax Credit permanent?

The Working Families Tax Cuts permanently expands the federal employer credit for paid family and medical leave.

How Payentry Can Help Employers Manage Paid Leave and Payroll

Understanding the expanded Paid Family and Medical Leave Tax Credit is only part of the process. Employers also need accurate payroll records, consistent leave tracking, and coordination between HR and payroll to properly administer paid leave programs.

Payentry can help employers simplify these processes by bringing payroll and HR management together in one place.

With Payentry, employers can streamline important payroll and HR tasks associated with employee leave, including tracking employee information, managing payroll, and maintaining accurate records. Having payroll and HR information connected can make it easier for employers to manage paid leave while keeping the information needed for payroll and benefits administration organized.

For employers evaluating their paid family and medical leave programs, Payentry can also help create a more connected process between HR, payroll, and employee benefits.

This can help employers:

Maintain accurate employee and payroll information.
Support consistent payroll processing when employees take qualifying leave.
Coordinate HR and payroll information.
Reduce manual administrative work.
Keep employee information organized.
Create a more efficient process for managing employee leave.
Support broader payroll and HR compliance efforts.

The Paid Family and Medical Leave Tax Credit itself requires employers to evaluate specific tax rules and should be reviewed with a qualified tax professional. Payentry can help with the payroll and HR administration that supports your overall leave management process, giving employers a more centralized way to manage important employee information.

A More Connected Approach to Payroll and HR

Paid leave is just one part of an employer’s broader HR and payroll responsibilities. When payroll, HR, benefits, and employee information are managed through disconnected processes, it can create additional administrative work and increase the potential for errors.

Payentry helps employers bring these functions together so they can spend less time managing administrative tasks and more time focusing on their employees and business.

If your organization is reviewing its paid family and medical leave program for 2026, it may also be a good time to evaluate whether your payroll and HR processes are equipped to support the changes.

Payentry’s experienced payroll, HR, benefits and tax professionals can help you simplify payroll and HR management while giving your business the tools and support needed to manage your workforce more efficiently.

Where can employers find the latest IRS information?

Employers can monitor the IRS Working Families Tax Cuts resource center, review Notice 2026 28, and consult the IRS Section 45S Employer Credit for Paid Family and Medical Leave FAQs.

The Bottom Line for Employers

The expansion of the Paid Family and Medical Leave Tax Credit gives employers another reason to evaluate their leave and benefits programs in 2026.

Expanded eligibility, the addition of qualifying insurance premiums, and a potential credit of 12.5 percent to 25 percent of qualifying wages could make paid family and medical leave a more attractive benefit for eligible businesses.

Paid family and medical leave can help employees navigate significant personal and family circumstances while supporting a broader employee benefits strategy.

At the same time, employers need to understand the requirements, maintain appropriate records, coordinate payroll and HR processes, and stay current as additional IRS guidance becomes available.

Businesses considering changes to their paid leave programs should work with their tax advisors, legal advisors, benefits professionals, and payroll providers to determine how the 2026 rules apply to their specific circumstances.

IRS Resources for Employers

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Important: This article is provided for general informational purposes and does not constitute tax, legal, or accounting advice. IRS guidance regarding the 2026 changes is continuing to develop. Employers should consult their tax advisor or legal counsel regarding how the rules apply to their specific circumstances.

*MPAY LLC dba Payentry (Company), is not a law firm. This article is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other Company materials does not create an attorney-client relationship. The Company is not responsible for any inadvertent errors that may occur in the publishing process.