Overview of the PFML Credit Changes
The Working Families Tax Cuts (WFTC) act permanently expanded the Paid Family & Medical Leave (PFML) employer tax credit, effective in taxable year 2026. The new guidance, found in Notice 2026-28, clarifies how and when employers can use the credit—including a new premium-based method alongside the traditional wage-based method. (irs.gov)
What’s Different Now
| Feature | Old Rule | New Under WFTC Credit |
|---|---|---|
| Eligibility | Employees with a year of service, full-time work focus | Employees with 6 months of service, part-time (20+ hrs/week) qualify. (irs.gov) |
| Credit basis | Wages paid during leave | Option to use insurance premiums paid/incurred, even if no employee takes leave. (irs.gov) |
| State/local leave mandates | Excluded in calculations | Counts toward eligibility (i.e. meeting duration & eligibility), though not in calculation of credit amount. (irs.gov) |
| Credit amount range | Previously lower or limited | 12.5% to 25% of wages or eligible premiums for up to 12 weeks leave. (irs.gov) |
How to Choose Between Wage-Based vs Premium-Based Methods
- The wage-based method still applies when you pay employees directly during their leave. Good for predictable or used leave rates.
- The premium-based method benefits employers who pay PFML insurance premiums—especially if leave take isn’t frequent. Useful for balancing cash flow and coverage costs.
- To use the premium method, follow guidance in Notice 2026-28 on elections and allocations. Keep documentation of premiums and how they relate to employees covered. (irs.gov)
Practical Examples
- A part-time employee (25 hrs/week) with 6 months on staff takes 8 weeks of leave in 2026. Employer can use either method, depending on whether they pay the wages or incur insurance premiums.
- An employer in a state with mandatory family leave (say California) can count that leave toward eligibility, even if paid locally. But credit calculation excludes state benefits—so both methods could still help.
Action Steps for Employers
- Review or set your PFML policy to meet the legal requirements (e.g. allow part-time employees after 6 months, 20-hour minimum).
- Track leave and insurance premium costs separately, so you can choose the most beneficial method.
- Implement election process timely—premium election requires correct election per IRS guidance.
- Design payroll and accounting systems to distinguish wages paid during leave vs premiums paid/incurred.
- Document state/local leave, especially in states with mandatory leave laws, to meet eligibility.
Implications for Tax Planning
- Good opportunity for small businesses to claim meaningful credits they might have missed before.
- Companies should model the cost vs benefit: premium method may cost upfront but reduce exposure if leave usage rises.
- Potential recruitment and retention advantage—benefits like PFML can make employers more competitive.
Bottom line: The PFML credit under WFTC is now broader, more flexible, and more beneficial. Employers should act now to adjust programs, systems, and elections to take full advantage.