Tax Planning
Paid Family & Medical Leave Credit Enhanced Under WFTC: What Employers Need to Know
The Working Families Tax Cuts permanently expands the PFML tax credit—making more employers eligible and adding a premium-based option starting in 2026.
By NomadicTax Research Team • 7 min read • August 28, 2026
## Overview of the PFML Credit Changes
The **Working Families Tax Cuts Act** permanently expands the **Employer Credit for Paid Family and Medical Leave** under **section 45S**, enhancing eligibility, expanding benefits, and giving multiple methods to compute credit. Notice 2026-28 issued August 5, 2026, lays out new rules. ([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))
Key enhancements effective for **taxable years beginning in 2026** include:
- **Expanded eligibility**: now includes part-time employees who work at least 20 hours per week and employees who have been with the employer at least **6 months**. Previously more restrictive. ([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))
- **New method**: employers may now claim the credit for **premiums paid** for PFML insurance policies (premium-based method), not just wages paid during leave. ([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))
- **Election flexibility**: employers can choose between the wage-based method and premium-based method to maximize benefit. Allocation rules included. ([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))
## Practical Implications for Employers
| Scenario | Under Old Law | Under New Law (2026+) |
|----------|----------------|------------------------|
| Small business offering PFML wages only | Eligible only if wages paid during leave | Also eligible if paying insurance premiums or covering wage payments; broader employee types qualify |
| Part-time staff or newer employees | Often not eligible | If working 20+ hours/week or with 6 months’ service, now potentially eligible |
| State or local mandated leave | Eligible for eligibility purposes, but not counting toward credit calculation | Same—mandated leave counts toward eligibility, but calculation still based on employer’s policy or wage payment method chosen ([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))
## Action Steps Employers Should Take Now
- **Review your existing PFML policy** to ensure it meets eligibility criteria under section 45S, especially coverage, hours, insurance arrangements.
- **Decide whether to use premium-based or wage-based method**. Simulate both to see which gives higher tax credit. Premium-based could be advantageous if employer already carries PFML insurance.
- **Track service durations and hours** to confirm which employees meet the 6-month and 20-hours/week thresholds.
- **Maintain proper documentation**, including payroll records, hours worked, wage payments, premium payments, and leave taken.
- **Coordinate with state laws**: keep in mind state PFML mandates may fulfill eligibility but may have separate rules for reporting or deduction.
## Example in Practice
Imagine “Sunrise Bakery” employs both full-time and part-time staff. Previously, only full-time employees who worked full leave hours were eligible, and only wages paid during leave counted.
- Under new rule, part-time employee working 25 hours/week and employed 7 months can generate credit when they take leave.
- If Sunrise Bakery also pays for PFML insurance premiums for employees, it can choose premium-method and claim credit on those premiums.
If Sunrise has 10 qualifying employees taking up to 12 weeks leave, the credit could reach **12.5-25%** of qualifying wages or premiums depending on length of leave and wages. ([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))
## Summary and Tips
The 2026 changes to the PFML credit under the Working Families Tax Cuts provide better opportunity for employers to support employees taking family or medical leave, while gaining tax relief. Expanded eligibility, premium-based credit option, and more inclusive definitions make it more accessible. Employers should analyze their current leave policies now, compare computation methods, and prepare to document things correctly to maximize the credit.
**Category**: Tax Planning