What Employers Need to Know About the Enhanced Paid Family and Medical Leave Tax Credit

Aug 20

3 min read

IRS Tax Tip 2026-64 Highlights New Opportunities for Businesses

Employers that provide paid family and medical leave (PFML) benefits to their employees may now have even greater tax-saving opportunities available to them. Recent changes under the Working Families Tax Cuts legislation have expanded and enhanced the federal Paid Family and Medical Leave Tax Credit, making it more accessible and valuable for many businesses, including small employers.

If your organization offers paid family and medical leave, now is an excellent time to review your policies and determine whether you qualify for this expanded federal tax benefit.

What Is the Paid Family and Medical Leave Tax Credit?

The Paid Family and Medical Leave (PFML) Tax Credit is a general business tax credit available to qualifying employers that provide paid leave to employees for family- and medical-related reasons.

Eligible employers may claim a tax credit ranging from 12.5% to 25% of qualifying wages paid to employees while they are on approved leave, for up to 12 weeks per employee, per taxable year.

Qualifying Reasons for Leave

Employees may be eligible for paid leave under the credit when they need time away from work for:

The birth of a child
Adoption or foster placement of a child
Their own serious health condition
Caring for a spouse, child, or parent with a serious health condition
Addressing matters related to a close relative serving on covered active military duty
Caring for a seriously ill or injured covered servicemember

Key Enhancements Employers Should Know

The Working Families Tax Cuts legislation has introduced several important changes that may expand eligibility and increase the number of businesses able to benefit from the credit.

1. The Credit Is Now Permanent

One of the most notable changes is that the PFML tax credit is no longer temporary. Employers can now incorporate this credit into their long-term workforce and benefits planning with greater certainty.

2. Expanded Employee Eligibility

Employers can now claim the credit for:

Employees who have completed at least six months of service
Certain part-time employees who work 20 hours or more per week

This change broadens the pool of qualifying employees and may allow more employers to take advantage of the credit.

3. Expanded Coverage Options

Previously, the credit primarily focused on wages paid during leave. Under the enhanced rules, employers may now be able to claim the credit based on:

Wages paid to employees while on qualifying leave, or
Premiums paid for qualifying PFML insurance policies

This flexibility gives employers additional options when structuring their leave programs.

4. Coordination With State and Local Leave Programs

Many employers operate in states or municipalities with mandatory paid leave requirements.

The updated rules allow leave provided under qualifying state or local mandates to count toward determining eligibility for the federal credit. However, employers should note that mandated leave payments generally cannot be included in the federal credit calculation itself.

Understanding the distinction is important when calculating the available credit.

Two Ways to Claim the Credit

Employers can now choose between two calculation methods:

Premium-Based Method

Under this method, the credit is based on qualifying premiums paid for PFML insurance coverage.

This approach may be beneficial for employers that provide leave benefits through an insurance policy rather than directly funding wage continuation.

Wage-Based Method

Under the traditional wage-based approach, the credit is based on qualifying wages paid to employees while they are on approved family or medical leave.

The best option will depend on an employer's leave program structure and overall compensation strategy.

Additional Guidance Available

The IRS has provided further details in Notice 2026-28, which:

Compares the premium-based and wage-based methods
Explains how qualifying insurance premiums should be allocated
Describes how employers may elect between the two calculation methods

Employers should carefully review the guidance and consult their tax advisor to determine which method provides the greatest tax benefit.

How ECB, LLC Can Help

The enhanced Paid Family and Medical Leave Tax Credit presents a valuable opportunity for employers to offset the cost of supporting their workforce while promoting employee well-being.

At ECB, LLC, we help businesses evaluate their eligibility, calculate available credits, and ensure compliance with IRS requirements. Whether you currently offer paid leave benefits or are considering implementing a program, our team can help you maximize available tax incentives.

Questions about the PFML Tax Credit or other employer tax benefits? Contact ECB, LLC today to discuss how these changes may impact your business.

Disclaimer: This blog is for informational purposes only and does not constitute legal or tax advice. Please consult with a qualified tax professional for personalized guidance.