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)
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)
- Credit ranges from 12.5% to 25% of qualifying wages for up to 12 weeks per employee per year. (irs.gov)
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)
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)
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)
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.