Compliance
Automatic Penalty Relief & Paid Family Leave: What Employers Must Know
New federal updates offer simpler penalty relief and enriched family leave credits for employers — compliance landscape has shifted.
By NomadicTax Research Team • 5-8 min read • August 21, 2026
## Penalty Relief Gets Easier for Compliant Taxpayers
- The **IRS has introduced an automatic penalty relief process** called the *Automatic Exemption from Penalty* (AEP), replacing the older First Time Abate program. ([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai))
- To qualify, taxpayers generally need a demonstrated history of filing and paying on time over the past **three tax years** or **12 consecutive quarters** for quarterly filers. ([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai))
- If eligible, relief is applied automatically for late filing, late payment, or failure to deposit penalties. If ineligible, reasonable cause relief is still available. ([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai))
## Permanent Expansion of the Paid Family & Medical Leave Credit
- Under the Working Families Tax Cuts (WFTC), the **section 45S PFML employer credit** has been expanded and made permanent. ([irs.gov](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?utm_source=openai))
- Employers can now also claim premiums paid for PFML insurance policies (not just wages paid during leave) starting in 2026. ([irs.gov](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?utm_source=openai))
- Credit ranges from **12.5% to 25%** of wages paid to qualifying employees for up to **12 weeks** of leave per taxable year. ([irs.gov](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?utm_source=openai))
## What Employers Should Do Now
- **Review payroll and leave policies**, ensuring PFML programs meet statutory requirements so the credit applies.
- **Track leave-related wages and premiums** separately to compute which method (wage-based vs. premium-based) will yield higher credit.
- **Adjust software and reporting systems** for the new penalty relief process so eligible clients/employees automatically benefit without extra filings.
## Case in Point: Employer Example
Say ABC Corp offers PFML. For an employee taking 10 weeks leave in 2026 with pay of $800/week, the wage-based credit would be between $1,000 (12.5%) and $2,000 (25%) depending on how much leave is required and wages paid. Under the premium-based method, if insurance premiums paid on behalf of employees are higher, that could yield a bigger credit.
## Compliance Risks to Watch For
- **Misclassifying leave or not meeting eligibility requirements** can jeopardize the credit. State or local mandated leave may count toward eligibility but *not toward calculation*. ([irs.gov](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?utm_source=openai))
- **Documentation is key**: Keep written policies, pay records, and premium invoices.
- **Watch for scams and phishing**: New IRS digital initiatives include more notices and digital interactions; secure communications matter. ([irs.gov](https://www.irs.gov/newsroom/news-releases-for-current-month?utm_source=openai))
## Summary
Businesses should take advantage of these two big changes: more straightforward relief from common IRS penalties for those with clean compliance histories, and enhanced incentives to support employees through paid family and medical leave. Both offer real financial benefits if leveraged properly.