Tax Planning

How the Employer **Paid Family and Medical Leave Credit (PFML)** Changed for 2026

Discover the expanded federal credit under section 45S: changes to include insurance premiums, how employers elect methods, and what eligibility looks like today.

By NomadicTax Research Team • 5-8 min read • August 29, 2026

## Overview of PFML under the Working Families Tax Cuts The Working Families Tax Cuts (WFTC) permanently expands and refines the employer credit for Paid Family and Medical Leave (PFML) under IRC § 45S. Key changes take effect beginning 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)) Notable updates: - Employers can now use a **premium-based method**, not just wages paid during leave. Premiums paid for insurance policies that fund PFML are eligible. ([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 qualifying wages for up to **12 weeks** per employee per 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)) ## Detailed breakdown ### Eligibility requirements - Employers must provide PFML that meets the **qualifying criteria** under section 45S. - Leave provided due to **state or local mandates** can count toward meeting eligibility—but such mandated leave **cannot be used** in calculating the credit. ([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)) ### Electing between the methods Employers can choose between two methods for computing the credit: - **Wage‐based method:** Credit based solely on wages paid during the leave. - **Premium‐based method:** Credit based on premiums paid or incurred related to PFML insurance policies. Employers must **elect explicitly** to use one method and may allocate qualifying premiums accordingly. ([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)) ### Examples for employers - **Small business scenario:** An employer offering PFML insurance, with eligible policies costing premiums, could use the premium method in 2026 to claim higher credit. If insurance premiums are $20,000, and wages paid during leave are $10,000, premium method may yield a larger credit. - **Leave under state mandate:** If a state requires PFML and employer satisfies leave requirement, the employer meets eligibility but **cannot count mandated leave wages** in computing the credit—that must be employer‐provided separate leave. ## Action items for employers before filing 2026 returns - Determine which PFML method (wage or premium) yields higher tax benefit. - Document your insurance premiums clearly—ensure they qualify under section 45S. - Update payroll systems to track required wage‐based or premium‐based data. - Keep up‐to‐date with forthcoming proposed regulations under § 45S that the IRS and Treasury are developing to flesh out this credit. ([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)) ## Implications - **High impact** for employers who offer PFML—especially small businesses. - Largely **federal** in scope; state or local mandates help eligibility but don't affect the base of the credit. - Complexities remain around tracking, documenting, and making method elections. ## Summary The PFML credit changes under law beginning with 2026 open up **new opportunities for tax savings** for employers who provide paid leave, especially through the insurance premium route. To maximize value, employers should assess their leave policies now and plan accordingly.