The employer credit for paid family and medical leave had a stop-and-start life. It first showed up in 2018, kept getting extended a year or two at a time, and employers never quite knew if it would be around long enough to build a policy on. The One Big Beautiful Bill Act ended that guessing game. As of 2026, the Section 45S credit is permanent, and it comes with new ways to qualify that make it worth a fresh look.
If you offer paid leave, or you are thinking about it, this credit can offset a real slice of the cost. Here is how the permanent version works, what changed, and how to claim it.
Section 45S gives employers a federal tax credit for wages paid to employees while they are on family and medical leave. The idea is to reward businesses that voluntarily offer paid leave, since federal law does not require it. Instead of the cost of that leave being a pure expense, part of it comes back as a credit against your tax bill.
The credit has always been a general business credit, meaning it reduces your tax dollar for dollar, and that structure carries into the permanent version. What the One Big Beautiful Bill did was lock it in and widen the doors to qualify.
The credit amount scales with how generous your leave policy is. It starts at 12.5% of the wages you pay during leave when the leave pays 50% of an employee's normal wages. From there it climbs by 0.25 percentage points for every point of wage replacement above 50%, topping out at 25% when leave is paid at 100% of normal wages.
So the more of an employee's pay you cover during leave, the larger the credit, up to that 25% ceiling, and the credit applies to up to 12 weeks of leave per employee per year. A policy that pays full wages during leave captures the maximum benefit.
Three changes make the permanent Section 45S credit more useful than the old temporary version, and each one opens it up to employers who could not use it before.
First, permanence itself, effective for 2026 and beyond. Employers can now build a paid leave policy knowing the credit will be there year after year, rather than betting on another short extension.
Second, a new premium option. Employers can now claim the credit based on insurance premiums they pay for a qualifying paid leave policy, not just wages paid during actual leave. This matters because it means you can benefit even in a year when no employee takes leave, as long as you are paying for qualifying coverage.
Third, a shorter tenure requirement. Employers can elect to use a six-month employment requirement for eligibility, down from the old one-year standard. That pulls newer employees into the pool and makes the credit reachable for businesses with higher turnover.
A few guardrails stay in place. The policy has to provide at least two weeks of annual paid family and medical leave for qualifying full-time employees, with a proportionate amount for part-time workers. The leave has to pay at least 50% of normal wages to qualify at all, which is why the credit scale starts there.
There is also a helpful clarification on state mandates. In states that require paid leave, employers can claim the credit for leave they provide above the state or local requirement, though that mandated baseline still counts toward the two-week minimum. In plain terms, the federal credit rewards the voluntary portion you offer on top of what your state already forces.
If you looked at the Section 45S credit a few years ago and passed, the math has changed. Permanence removes the risk of building a policy around a credit that might vanish, the premium option lets you benefit without waiting for someone to take leave, and the six-month rule widens who counts. Treasury and the IRS also issued fresh guidance in 2026 (including Notice 2026-28) on how the wage method and the new premium method work, so the mechanics are clearer than they have ever been.
Claiming it well means matching your leave policy design to the credit scale and picking the right method for your workforce. If you or your clients want to set up or optimize a paid leave policy to capture the permanent credit, Madras Accountancy can model the wage versus premium methods and coordinate it with your payroll and tax preparation so the credit is captured cleanly each year.
1. Is the Section 45S paid leave credit permanent now? Yes. The One Big Beautiful Bill Act made the employer credit for paid family and medical leave permanent, effective for 2026 and later years.
2. How much is the credit worth? It ranges from 12.5% of wages paid during leave when leave is paid at 50% of normal wages, up to 25% when leave is paid at 100%, applied to up to 12 weeks of leave per employee per year.
3. What is the new premium option? Employers can now claim the credit based on insurance premiums paid for a qualifying paid leave policy, even in a year when no employee actually takes leave, rather than only on wages paid during leave.
4. Did the employee tenure requirement change? Yes. Employers can elect a six-month employment requirement for eligibility, down from the previous one-year standard, which brings newer employees into the credit.
5. What is the minimum policy requirement? The policy must provide at least two weeks of annual paid family and medical leave for full-time employees, paying at least 50% of normal wages, with a proportionate amount for part-time employees.
6. How does the credit work with state paid leave mandates? Employers can claim the credit for leave provided above a state or local requirement. The mandated portion still counts toward the two-week minimum but does not itself generate the federal credit.
7. Is the credit refundable? No. It is a general business credit that reduces your tax liability. It is not refundable, though general business credit carryover rules can apply.
8. Where can I find the current IRS guidance? Treasury and the IRS issued 2026 guidance, including Notice 2026-28, explaining the statutory wage method and the new premium method for the permanent credit.
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