There are many excellent reasons for employers to offer paid family and medical leave. Paid leave benefits attract and retain talent, strengthen workplace culture, bolster productivity, and enhance employee wellbeing.
Employers now have a new incentive to consider. In August 2026, the IRS issued Notice 2026-28, which announced that employers will have permanent access to the paid family and medical leave tax credit. This credit allows eligible employers to collect up to 25% of the wages they paid to employees taking paid family or medical leave.
Understanding The Section 45S Tax Credit
The 45S credit encourages employers to provide paid family and medical leave. Originally introduced in 2017 as a two-year pilot program and extended through 2025, the credit was made permanent through the One Big Beautiful Bill Act.
The IRS’ 2026 guidance clarifies how the credit has been enhanced since its introduction. Key changes include expanded eligibility, broader coverage, and new rules for calculating leave provided under state or local mandates.
Can My Company Get Credit For The Paid Leave We Provide?
Through the Section 45S tax credit, businesses can regain a portion of the benefits paid to workers on qualifying family or medical leave. Here’s how to determine whether your organization can claim the credit and how much you could receive.
Qualifying Employers
The 45S credit imposes no restrictions related to an employer’s size. Any sized employer can qualify, even if the organization is not subject to the Family and Medical Leave Act (FMLA).
Employers must meet the following requirements:
- Employers must have a written policy governing paid family leave
- The policy must provide at least two weeks of annual paid family and medical leave for full-time employees. Additionally, it must also supply a proportionate amount for part-time workers.
- The policy must provide workers at least 50% of their normal wages while they’re on leave.
- If any qualifying employees aren’t covered under Title I of the FMLA, the policy must include a “non-interference” clause — a commitment not to interfere with their use of the policy or retaliate against them for raising concerns about it.
Qualifying Employees
To get the credit, employers must have supplied leave to qualifying employees. Employees must also satisfy three requirements.
- First, the employee needs to have worked at the employer for at least twelve months. The new guidance clarifies that employers may also elect to include employees who have been with the company for six months.
- Second, the employee must make no more than $96,000 or 60% of the highly compensated employee threshold as defined by federal law in the previous year.
- Finally, employees must normally work at least 20 hours per week.
Qualifying Leave
The Section 45S Tax Credit is reserved for leave taken for reasons that align with the FMLA’s provisions. For example, eligible employers can get credit when a qualifying employee takes leave after the birth or adoption of a child, to care for a family member with a serious health condition, or to recover from their own serious illness. While vacation or general sick leave does not qualify, leave that falls under a short-term disability program may.
Qualifying Under State Paid Programs
Another important update is that leave mandated by state or local law counts toward an employer’s eligibility. But it cannot be included in the credit calculation. If the state you operate in mandates two weeks of paid leave, for example, and you provide four weeks of paid leave, you may only claim the credit for the leave you provided voluntarily.
Two Ways to Calculate
There are two ways to calculate the Section 45S tax credit.
Wage Method. The first way is the wage method. Under this method, employers receive a percentage of the wages paid to employees on leave. Employers with policies paying 50% of employees’ normal wages can receive 12.5% of the wages paid to employees on leave through tax credits.
Additionally, employers can receive bigger tax credits by offering more generous provisions. For every percentage point above 50%, the credit increases by 0.25 percentage points to a maximum of a 25% credit.
Example: An employer that pays 60% of normal wages would receive a 15% credit. On $5,000 of leave wages, the credit would amount to $750.
Alternative Method. The updated version of the credit created an alternative calculation method. Employers with an insurance policy for paid leave may determine the credit according to the percentage of premiums paid during the tax year, as opposed to wages.
As You Weigh The 45S Credit, Consider Leave Software
If you’re considering the Section 45S tax credit, you’re likely taking a hard look at your leave program. You may notice that it’s not operating the way you’d like. Perhaps you’ve spotted inefficiencies, inaccuracies, or even errors. Whether your program is managed manually or outsourced, there’s a chance you’ve realized it isn’t delivering the support employees need or the visibility you rely on.
These observations are worth paying attention to, especially if you’re updating your paid leave policy or establishing one. They’re indications that your leave program needs to be upgraded. When you implement leave and accommodations software, you’ll replace spreadsheets and re-purposed tools with a purpose-built system.
Making the switch will unlock several distinct benefits. First, you’ll minimize manual work and the errors it creates. Next, you’ll get visibility into your program. Sophisticated leave technology will identify your worst bottlenecks and highlight your best opportunities. Finally, you’ll elevate the employee experience, ensuring employees get quick access to the benefits they need.
The most important benefit leave management technology brings is enhanced compliance. A sophisticated system will provide automatic eligibility calculations and maintain processes that support federal and state leave laws. You can also leverage your system to administer your organization’s own family and medical leave policies, ensuring your program is both consistent and compliant.
Want to learn more about how leave software can transform your program? Check out our article: The Comprehensive HR Guide to Leave Management Software.
A Great Leave Program Starts With the Right Tools
The Section 45S tax credit is a significant opportunity for employers that offer or want to offer paid family and medical leave. If your organization qualifies, it’s worth reaching out to your tax advisor or legal team to consider pursuing the credit.
As you ponder the credit, take the time to evaluate your leave program. Strong leave management requires sophisticated technology. If you’re interested in learning more about how leave software could transform your program, get in touch with AbsenceSoft today.
Disclaimer: The content published on this blog is for general and educational purposes only. It should not be construed as, or relied upon as, formal legal, financial, or tax advice. Laws, regulations, and tax codes change frequently and vary by jurisdiction. Accordingly, we make no representations or warranties about the completeness or accuracy of the material here. Lastly, always seek the advice of a licensed attorney in your jurisdiction for legal matters, or a qualified tax professional/CPA for tax-related decisions, before making any choices based on information found on this page.