A Tax Credit for Taking Care of Your People: The Paid Family and Medical Leave Credit Is Now Permanent
- Records In Order
- 15 hours ago
- 3 min read
A client briefing from Records In Order
If you've ever wanted to offer paid family leave but worried about the cost, 2026 is the year to take another look. As part of last year's major tax legislation (the One Big Beautiful Bill Act, marketed as the working families tax cuts), Congress made the Employer Credit for Paid Family and Medical Leave (IRC §45S) a permanent part of the tax code — and expanded it in ways that make it far more usable for small and mid-size employers.
What the credit does
The federal government will reimburse you for 12.5% to 25% of the wages you pay employees while they're on family or medical leave. The percentage slides with your generosity: pay an employee 50% of their normal wages during leave and you get a 12.5% credit; the credit grows as your replacement rate rises, topping out at 25% if you pay full wages. Up to 12 weeks of leave per employee per year can qualify.
Qualifying leave follows the familiar FMLA categories: the birth or adoption of a child, a serious health condition of the employee or a family member, and certain military-family circumstances. Regular vacation, PTO, or sick leave does not count — the leave must be specifically designated for these family and medical purposes in a written policy.
What changed for 2026
Three improvements matter most:
1. It's permanent. The credit had been a temporary provision on the verge of expiring. Employers can now build a paid-leave policy around it without worrying the credit disappears next year.
2. You can claim it on insurance premiums instead of wages. This is the game-changer for smaller employers. Rather than self-funding leave and claiming the credit on wages paid, you can buy a paid family and medical leave insurance policy and claim the same 12.5%–25% credit against the premiums. That converts an unpredictable cost (who will take leave this year?) into a fixed, budgetable one — with a federal subsidy attached.
3. Newer employees can qualify sooner. Employers may now elect a six-month minimum-employment requirement instead of one year, letting you extend the benefit — and the credit — to more of your team.
Who counts as a qualifying employee
The credit targets rank-and-file compensation: an employee qualifies only if their prior-year pay was at or below 60% of the "highly compensated employee" threshold (roughly the mid-$90,000s for 2026 leave — we'll confirm the exact figure for your plan). Part-time employees can be included, with the two-week minimum leave prorated.
A quick example
Suppose your clinic pays a front-office manager earning $62,000 her full salary for 8 weeks of parental leave — about $9,538 of leave wages. At 100% wage replacement, the cred
it rate is 25%, so the federal credit is roughly $2,385. You were going to want to keep her anyway; now the tax code pays a quarter of the cost of doing it right.
The California wrinkle (important)
Wages required by state or local law don't count toward the credit — only employer-provided benefits above the mandate do. California employers: your employees already receive Paid Family Leave through the state SDI system, so the credit applies to what you add on top — for example, "topping up" the state benefit to full salary, or covering leave the state program doesn't. This makes plan design matter: structured well, a California top-up policy can qualify; structured carelessly, it won't.
What to do before offering leave
The credit requires a written policy in place before the leave is taken, providing at least two weeks of leave at no less than 50% pay, with certain employee protections. Retroactive claims on informal arrangements don't work. If you'd like to add paid family leave in 2026 — whether self-funded or through an insurance product — talk to us first and we'll structure the policy so every eligible dollar earns the credit.
Scott C Turner CPA
Comments