§45S Employer Paid Family Leave Credit: What IRS Notice 2026-28 Changes
The employer credit for paid family and medical leave is permanent now, it can be claimed on insurance premiums, and it can reach employees after six months, at the employer’s election, instead of a year. Here is the short version for small employers and S-corp owners.
What does IRS Notice 2026-28 say about the §45S paid family leave credit?
Notice 2026-28, announced August 5, 2026 in IR-2026-86, is the IRS's first substantive guidance on the §45S employer credit for paid family and medical leave as made permanent and expanded by P.L. 119-21. It covers three changes: employers may now claim the credit on a portion of premiums paid for insurance that provides paid family and medical leave, not only on wages actually paid during leave; an employer may elect a six-month minimum employment period in place of the one-year rule; and state- or local-mandated leave now counts toward whether an employer's written policy provides enough qualifying leave, though wages and premiums attributable to the mandated portion do not count when calculating the credit amount. The credit remains 12.5% of qualifying wages, scaling to 25% as the leave pay rate rises from 50% to 100% of normal wages, capped at 12 weeks per employee per year, and is claimed on Form 8994.
- §45S is permanent under P.L. 119-21 — no more expiration cliff to plan around.
- New premium method: claim the credit on qualifying paid-leave insurance premiums.
- Employers may ELECT a 6-month minimum employment period instead of 12 months.
- Mandated leave counts toward policy eligibility, but its wages or premiums do not count toward the credit amount.
- Credit rate: 12.5% at 50% pay, scaling to 25% at 100% pay; 12 weeks max per employee.
- Claimed on Form 8994 and carried to Form 3800 as a general business credit.
Source:IRS Newsroom — IR-2026-86, guidance on the employer credit for paid family and medical leave
1. The three changes that matter
Change 1
You can claim the credit on premiums, not just wages
Historically the credit only rewarded leave that employees actually took: no leave taken, no wages paid, no credit — even though the employer was carrying the cost of the benefit all year. The premium method fixes that. An employer that buys an insurance policy providing paid family and medical leave can claim the credit on the qualifying share of the premiums it pays. Notice 2026-28 sets out how to identify that share and, importantly, what to strip out of it: premiums attributable to leave mandated by state or local law, and premiums attributable to workers who are not qualifying employees.
Change 2
Six months of employment, at the employer’s election
The statute now reads “one year (or not less than six months at the election of the employer).” The shorter period is an election the employer makes, not an automatic change — the default remains one year unless the employer elects otherwise, and Notice 2026-28 confirms that reading. For employers in high-turnover industries — restaurants, retail, home care, construction — electing six months is the single largest practical expansion, because a large share of the workforce never cleared the twelve-month line. Note that a qualifying employee must also be customarily employed for at least 20 hours per week.
Change 3
Every state is in scope
Employers in states with their own paid-leave programs are no longer shut out of the credit. State- or local-mandated leave counts toward whether the employer’s written policy provides enough qualifying leave. The carve-out applies later: wages and premiums attributable to the mandated portion do not count when calculating the credit amount. Voluntary leave above the mandate can.
2. How the credit is computed
The credit is a percentage of qualifying wages paid during family and medical leave. The percentage is 12.5% when leave is paid at 50% of the employee’s normal wage rate, and it increases by 0.25 percentage points for each percentage point that the leave pay rate exceeds 50%, up to 25% at full pay.
- Leave paid below 50% of normal wages earns no credit.
- No more than 12 weeks of leave per employee per taxable year counts.
- Wages used for the §45S credit cannot also be used for another wage-based credit, and the employer’s wage deduction is reduced by the amount of the credit.
- Paid vacation, personal leave, and ordinary sick leave are not family and medical leave for this purpose.
3. What you need in place before you claim it
A written policy is the gate.
§45S requires a written paid family and medical leave policy that is in place before the leave is taken, covers all qualifying employees, provides at least two weeks of annual paid leave (pro-rated for part-time employees), and pays at not less than 50% of normal wages. Employers who pay leave generously but never wrote the policy down do not get the credit. This is the most common reason a §45S claim fails on examination.
Keep the policy document, the payroll records showing leave wages separately, and — if you use the premium method — the insurance contract and the computation showing how you carved out mandated-leave and non-qualifying-employee premiums.
4. Filing mechanics
- Compute the credit on Form 8994, Employer Credit for Paid Family and Medical Leave.
- Carry it to Form 3800, General Business Credit, where the general business credit limitation applies. Unused credit follows the normal one-year carryback and twenty-year carryforward rules.
- S corporations and partnerships do not use the credit at the entity level — it passes through to shareholders and partners on the Schedule K-1 and is claimed on their returns. See the Schedule K-1 guide for how credits appear on the K-1.
- Reduce your wage deduction by the credit amount — you cannot deduct the wages and take the credit on the same dollars.
Related tools & guides
Frequently asked questions
- Is the §45S paid family leave credit still available?
- Yes, and it is now permanent. The credit had been a temporary provision that Congress repeatedly extended; the One Big Beautiful Bill Act (P.L. 119-21) made it permanent and expanded it. IRS Notice 2026-28, announced August 5, 2026 in IR-2026-86, is the first substantive guidance on the expanded version.
- How much is the credit worth?
- It is a general business credit equal to 12.5% of wages paid to a qualifying employee while on family and medical leave, rising on a sliding scale to 25% as the rate of pay during leave rises from 50% to 100% of normal wages. Leave must be paid at no less than 50% of normal wages to qualify at all, and no more than 12 weeks per employee per year counts.
- What is the new premium method?
- Under the OBBB expansion, an employer that pays premiums for an insurance policy providing paid family and medical leave can claim the credit on a portion of those premiums, instead of only on wages actually paid out during leave taken. Notice 2026-28 sets out how to compute that portion and which premiums are excluded — notably premiums attributable to state- or local-mandated leave, and premiums for employees who do not meet the qualifying-employee test.
- Which employees count?
- A qualifying employee must have been employed for one year — or for not less than six months, at the election of the employer. The six-month period is an employer election, not an automatic replacement of the one-year rule, and Notice 2026-28 confirms it. The employee must also be customarily employed for at least 20 hours per week, and must not be a highly compensated employee: for §45S that test is compensation for the preceding year of no more than 60% of the §414(q) threshold, not simply compensation below the threshold itself.
- Can employers in states with mandated paid leave claim it?
- Yes. State- or local-mandated leave now counts when determining whether the employer's written policy provides enough qualifying leave, so employers in every state can qualify. But wages paid, or insurance premiums attributable to, the mandated portion do not count when calculating the credit amount; voluntary leave above the mandate can generate the credit.
- What form do I file?
- Form 8994, Employer Credit for Paid Family and Medical Leave. The result flows to Form 3800 as part of the general business credit. For an S corporation or partnership, the credit passes through to owners on the Schedule K-1.
Sources & References
Primary references used for this content
IRS issues guidance on the employer credit for paid family and medical leave
August 5, 2026 announcement of Notice 2026-28 on the permanent, expanded §45S credit
View on irs.gov
Employer credit for paid family and medical leave
Statutory text: credit percentages, qualifying employee test, written policy requirement
View on law.cornell.edu
Form 8994 — Employer Credit for Paid Family and Medical Leave
Form and instructions used to compute and claim the credit
View on irs.gov
One Big Beautiful Bill Act — §45S permanence and expansion
Legislation making the credit permanent, adding the premium method, and lowering the employment threshold
View on congress.gov
✓4 primary sources; links re-checked on a weekly rotation by the source watcher
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