What’s New Under the PFML Credit Expansion
The Working Families Tax Cuts (WFTC) law permanently expanded the employer credit for paid family and medical leave (PFML) under IRC Section 45S. Starting in 2026, employers may claim a credit based on either wages paid during leave or premiums paid for insurance policies, in addition to wages. (irs.gov)
Key elements include:
- A credit ranging from 12.5% to 25% of wages paid while employees take qualifying leave years.
- Starting 2026, premium-based methods introduced for those who insure the leave instead of directly paying wages. Explains how to elect between wage-based and premium-based options. (irs.gov)
What Employers Should Do Now
- Determine whether your PFML plan provides paid leave through wages or insurance premiums.
- Compute which method yields greater tax savings—premium-based or wage-based—considering your small business status and cash flow.
- Ensure the leave meets statutory criteria to be qualifying: duration (up to 12 weeks per taxable year), eligible reason, etc. Elections might need to be made on your tax return.
- Track related state or local mandates—while they can satisfy eligibility for the credit, they cannot be used in calculating the credit amount. (irs.gov)
Digital Nomads & Remote-First Employers: What to Consider
Digital nomads working remotely for U.S. employers or clients or employers hiring nomadic contractors must be alert to PFML:
- If you’re considered an employee under IRS rules and your employer offers PFML, you may be covered even if working abroad—wage payments or premiums qualify.
- Employers with remote workforce should clearly define eligibility and how leave is documented when workers are dispersed across jurisdictions.
- Think about state-level paid leave programs—some states have their own PFML laws. Federal credit does not override state requirements but may complement them.
Illustrative Example
- Scenario: Your small business of 20 employees provides PFML via an insurance policy (premium method). You pay $500/month per employee in premium, and your leave program satisfies all requirements.
- If employees take qualifying leave totaling, say, $30,000 in wages under wage-based method, a 25% credit yields $7,500. If your total premiums paid were $12,000 eligible under premium method, a 25% credit would be $3,000—so wage-based is more valuable in that year.
Common Mistakes to Avoid
- Failing to elect between wage- and premium-based methods properly—voids the ability to claim the credit under the premium method.
- Assuming state PFML mandates always mean you qualify—state leave might fulfill eligibility but not always satisfy federal credit standards.
- Not maintaining clear documentation of leave, premium payments, or wage payments during leave.
Federal Timeline & Effective Dates
- Permanent expansion takes effect in 2026.
- Related guidance includes Notice 2026-28, released in August 2026—clarifying how to apply the new rules. Proposed regulations are forthcoming to fill in implementation gaps. (irs.gov)