Paid Family and Medical Leave Tax Credit 2026: Save Big

By Adham Abadier, CPA — Licensed in California, License #158599.

As small business owners in Moreno Valley and the wider Inland Empire prepare for upcoming tax filings, understanding the newly expanded paid family and medical leave tax credit 2026 is essential. At Catalyst CPA Corporation, we help local businesses navigate these complex regulations through our professional CPA services, ensuring you remain compliant while maximizing your federal incentives.

The federal paid family and medical leave tax credit 2026, governed by IRC Section 45S, is a permanent tax credit for employers providing paid leave. Under the One Big Beautiful Bill Act (OBBBA), the credit now covers paid insurance premiums, part-time employees working 20+ hours weekly, and employees with six months of tenure, provided their preceding-year compensation does not exceed $96,000.

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Key Takeaways

• Permanent Status: The Section 45S tax credit was made permanent under the One Big Beautiful Bill Act (OBBBA) in 2025.
• Expanded Eligibility: Employers can now claim the credit for premiums paid for paid family and medical leave insurance plans.
• Reduced Tenure Requirements: Benefits provided to employees who have worked for as little as six months can now qualify for the credit.
• Part-Time Inclusion: Credits are available for employer-provided benefits for part-time employees working 20 hours or more per week.
• Income Threshold: To qualify, an employee’s preceding-year compensation cannot exceed 60% of a “highly compensated employee” threshold, which is set at $96,000 for 2026.
• State Program Transition: IRS Notice 2026-6 extends the transition period through calendar year 2026 for reporting and compliance regarding state-administered PFML programs.

The Permanent Expansion of the Section 45S Credit

The federal paid family and medical leave tax credit was originally established by the 2017 Tax Cuts and Jobs Act (TCJA) as a temporary incentive. However, under the One Big Beautiful Bill Act (OBBBA) passed in 2025, this credit has been made permanent, providing long-term tax planning strategy certainty for businesses in Moreno Valley, Riverside, and across the nation. The credit is codified under Internal Revenue Code (IRC) Section 45S and serves as a general business tax credit to meaningfully offset the cost of providing paid family and medical leave to employees.

According to a press release from the office of U.S. Senator Deb Fischer, who championed the policy, the Treasury Department and the IRS have prioritized issuing updated guidance to implement Section 45S. In a Senate Appropriations Subcommittee hearing on April 23, 2026, Treasury Secretary Scott Bessent confirmed that the Office of Tax Policy has been working diligently with stakeholders and aimed to issue updated guidance “early this summer” to ensure employers can accurately claim these tax credits and deductions.

Legislative Background and the Working Families Tax Cuts Act

The journey of the Section 45S credit highlights its growing importance in federal tax policy. Initially introduced as a pilot program, it was enhanced and made permanent under the Working Families Tax Cuts Act and the OBBBA. This transition from a temporary tax extender to a permanent fixture of the tax code allows business owners to confidently integrate paid leave benefits into their multi-year compensation and retention strategies.

Treasury and IRS Guidance Timeline

With the permanent expansion taking full effect, business owners have eagerly awaited administrative clarifications. The collaboration between congressional offices and the Treasury’s Office of Tax Policy ensures that the upcoming guidance will address outstanding Section 45S issues, making it easier for employers to calculate and claim the credit without administrative friction.

Key Eligibility Rules for the Paid Family and Medical Leave Tax Credit 2026

To claim the paid family and medical leave tax credit 2026, employers must meet specific statutory requirements regarding their written policies and employee compensation. The credit is designed to incentivize leave for lower-compensated employees, meaning highly compensated staff are excluded from the calculation.

The 2026 Compensation Limit Explained

According to the Congressional Research Service (CRS In Focus IF11141), the credit can only be claimed for paid family and medical leave (PFML) provided to certain lower-compensated employees. For wages paid to an employee to be credit-eligible, their compensation in the preceding year cannot exceed 60% of a “highly compensated employee” threshold. For the 2026 tax year, this specific threshold is set at $96,000.

Written Policy Requirements for Employers

To be eligible for the credit, an employer must have a written policy in place that meets the following criteria:

1. The policy must make PFML available to all qualifying employees who meet the income threshold and have been employed by the employer for at least one year.
2. The policy must provide at least two weeks of paid leave annually for full-time employees (and a pro-rata amount for part-time employees).
3. The rate of payment must be at least 50% of the wages normally paid to the employee.

Under the new OBBBA provisions, employers may also elect to offer PFML and claim the credit for employees who have been employed for at least six months, providing greater flexibility for businesses with seasonal or high-turnover workforces.

Confused by the new Section 45S rules for your business?
Don’t leave money on the table. Let Adham Abadier, CPA, personally review your employee leave policies and insurance premiums to ensure you qualify for the maximum federal tax credit this year.
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New OBBBA Provisions for the Paid Family and Medical Leave Tax Credit 2026

The permanent expansion under the OBBBA introduced several taxpayer-friendly provisions that make the credit far more accessible to small and mid-sized businesses. These changes significantly broaden the scope of what qualifies as credit-eligible expenses.

Including Insurance Premiums in Your Credit Calculation

According to the Department of Labor (DOL) Fact Sheet, one of the most significant updates is that premiums paid for paid family and medical leave insurance plans are now eligible for the credit. Previously, only direct wage payments during leave qualified. This change allows employers who fund their leave programs through commercial insurance policies to offset a portion of their premium costs directly through their federal tax return.

Expanding Coverage to Part-Time and Short-Tenure Employees

The OBBBA also addresses workforce diversity by expanding the credit to cover part-time employees working 20 hours or more per week. Furthermore, employers can now claim the credit for benefits provided to employees who have worked for as little as six months, rather than the strict one-year requirement previously mandated. This is particularly beneficial for businesses in the Inland Empire that rely on flexible or seasonal staffing models.

State-Administered Programs and Notice 2026-6 Transition Rules

Many states, including California, administer their own paid family and medical leave programs. Navigating the interplay between state-mandated benefits and the federal Section 45S credit requires careful attention to administrative guidance. On January 15, 2025, the Treasury Department and the IRS issued Revenue Ruling 2025-4, which provided guidance on the income and employment tax treatment of contributions and benefits under state-administered PFML programs.

The Interplay Between Federal Credits and State PFML Programs

Recognizing that states and employers needed additional time to configure their reporting and payroll systems, the IRS issued Notice 2026-6. This notice extends the transition period provided in Revenue Ruling 2025-4 through calendar year 2026. This extension applies to states administering paid family and medical leave programs and employers participating in such programs with respect to the portion of medical leave benefits a State pays to an individual that is attributable to employer contributions.

What Notice 2026-6 Means for Your 2026 Payroll Reporting

The transition period is intended to facilitate an orderly transition to compliance with federal income and employment tax obligations, as well as related information reporting requirements. This means that calendar year 2026 serves as an additional transition year for IRS enforcement and administration, giving Inland Empire business owners breathing room to align their payroll systems with the federal rules without facing immediate penalties.

Feature	Original TCJA Rules (2017)	New OBBBA Permanent Rules (2026)
Permanency	Temporary (subject to expiration)	Made permanent under the OBBBA
Insurance Premiums	Not explicitly eligible for the credit	Premiums paid for PFML insurance plans are eligible
Minimum Employee Tenure	Required at least one year of employment	Employers can elect to qualify employees with as little as six months of tenure
Part-Time Employees	Often excluded or complex to calculate	Credits available for part-time employees working 20+ hours a week
Income Threshold	Subject to older highly compensated limits	Preceding-year compensation limit set at $96,000 for 2026

Actionable Steps to Implement and Claim the Credit

To successfully claim the paid family and medical leave tax credit 2026, local businesses in Moreno Valley, Riverside, and Corona must ensure their internal policies are legally compliant and properly documented. Taking a proactive approach to policy drafting and payroll tracking is essential.

1. Draft or Update Your Written Policy: Your business must have a formal, written policy in place before the leave is taken. This policy must explicitly state that paid leave is available to all qualifying employees who meet the $96,000 preceding-year compensation threshold. It must guarantee at least two weeks of paid leave for full-time employees, paid at a rate of at least 50% of their normal wages.
2. Determine Your Tenure and Part-Time Elections: Decide whether your business will utilize the expanded OBBBA provisions. You can elect to shorten the required employment tenure from one year to six months, allowing you to claim the credit for a broader segment of your workforce. Additionally, ensure your tracking systems are configured to identify part-time employees who work 20 hours or more per week, as their paid leave benefits are now credit-eligible.
3. Track Eligible Insurance Premiums: Because the OBBBA now allows premiums paid for paid family and medical leave insurance plans to qualify for the credit, you must maintain meticulous records of these payments. Work with your insurance broker and CPA to separate these premium costs from other commercial insurance lines so they can be easily identified on your general ledger.
4. Coordinate with State Reporting Systems: Keep in mind that under Notice 2026-6, the transition period for state-administered program reporting has been extended through the end of 2026. Ensure your payroll provider is aware of these extended timelines and is correctly categorizing the portion of medical leave benefits attributable to employer contributions.

To track these leave-wages and premium payments accurately, many local businesses rely on professional bookkeeping help to maintain clean financial records throughout the year.

Frequently Asked Questions

How do I qualify for the paid family and medical leave tax credit 2026?

To qualify for the paid family and medical leave tax credit 2026, an employer must have a written policy providing at least two weeks of paid family and medical leave to all qualifying employees. The leave must be paid at a rate of at least 50% of the employee’s normal wages, and the employee’s preceding-year compensation cannot exceed $96,000.

Can I claim the credit for part-time employees?

Yes. Under the permanent OBBBA provisions, credits are available for employer-provided benefits for part-time employees who work 20 hours or more per week, provided they meet the other eligibility requirements and income thresholds.

Are paid leave insurance premiums eligible for the credit?

Yes. One of the key expansions introduced by the OBBBA is that premiums paid for paid family and medical leave insurance plans are now eligible for the Section 45S tax credit, providing additional savings for employers who utilize private insurance to fund their leave programs.

What is the minimum employment tenure required for employees to qualify?

While the standard written policy must cover employees who have been employed for at least one year, employers can elect to offer PFML and claim the credit for employees who have worked for the business for as little as six months.

How does IRS Notice 2026-6 affect my business?

Notice 2026-6 extends the transition period through calendar year 2026 for reporting and compliance requirements related to state-administered paid family and medical leave programs. This gives employers and states an additional year to configure their systems to comply with the rules outlined in Revenue Ruling 2025-4.

What is the maximum compensation an employee can have to be eligible?

To be eligible for the credit, an employee’s compensation in the preceding year cannot exceed 60% of the highly compensated employee threshold. For the 2026 tax year, this specific threshold is set at $96,000.

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Claiming the Paid Family and Medical Leave Tax Credit 2026 with Catalyst CPA

Navigating the permanent expansion of Section 45S requires careful planning, precise payroll tracking, and a clear understanding of how federal credits interact with state-administered programs. By aligning your written policies with the new OBBBA guidelines and understanding the transition rules under Notice 2026-6, your business can secure valuable tax savings while supporting your workforce.

If you need assistance structuring your employee benefits, updating your written policies, or filing your business tax returns, reach out to our comprehensive tax advisory services. We work closely with business owners across Moreno Valley, Riverside, and the wider Inland Empire to ensure full compliance and optimal tax positioning. Partnering with a tax accountant Moreno Valley business owners trust is the best way to secure these incentives.