The Paid Family Leave Credit Just Got Permanent — and Way More Useful for Small Firms

For years, the paid family and medical leave credit was the tax benefit everyone mentioned and almost nobody claimed. Section 45S was temporary, the eligibility bar was high, and the payoff was a confusing percentage of wages with a paperwork trail most small firms didn't want to chase. So most ignored it.

That's now outdated advice.

On August 5, 2026, Treasury and the IRS issued Notice 2026-28 (IR-2026-86), implementing the Working Families Tax Cuts' permanent expansion of the Section 45S credit. This isn't a one-year extension. It's a structural rewrite that makes the credit genuinely relevant to small firms — the exact clients most of us have the most of.

If you do payroll, run a small firm, or advise small business owners, read this before your next client meeting. Because your clients just become eligible in ways they weren't last year — and if you don't raise it, your competitor will.

What Actually Changed

The WFTC takes a credit that was scheduled to die and makes it permanent, while widening the net for who can claim it. Four changes matter:

It's permanent now. Section 45S was previously set to expire for tax years beginning after December 31, 2025. The Working Families Tax Cuts makes it permanent. Worth noting for a payroll benefit: employers can now build the credit into ongoing budgeting and benefit design instead of treating it as a one-year gamble.

The premium-based method (new for 2026). This is the biggest practical change. Starting in tax years beginning in 2026, employers can claim the credit on premiums paid for PFML insurance policies — in addition to (or instead of) the traditional wage-based method. For firms that buy state-run or private paid leave insurance, this is a much cleaner calculation than tracking per-employee leave wages. Notice 2026-28 walks through how the premium method compares to the wage method, how to allocate qualifying premiums, and how to elect between the two.

Lower eligibility bar. The credit now reaches employees with six months of service (previously one year) and part-time employees customarily working 20 or more hours per week. That's a meaningful expansion. A small firm's newer hires and its part-timers — the people who often get left out of benefits — now count toward the credit.

Broader base. Employers can now claim the credit on insurance premiums for leave or wages paid during leave, whichever suits how they structure benefits.

The Credit Itself: The Numbers to Get Right

The credit mechanics remain anchored to the wage-based formula, and this is where accuracy matters:

• The credit is a general business credit equal to a percentage of wages paid to qualifying employees while on family and medical leave, up to 12 weeks per taxable year.
• The percentage ranges from 12.5% to 25%, stepping up by 0.25% for each percentage point the paid leave rate exceeds 50% of the employee's normal wages, capping at 25%.
• To qualify, an employer must maintain a written policy providing at least two weeks of paid family and medical leave annually (prorated for part-timers), paid at no less than 50% of normal wages.

The written policy requirement trips up more small firms than anything else. The leave must be specifically designated for FMLA purposes — birth/care of a child, placement for adoption or foster care, caring for a spouse/child/parent with a serious health condition, or the employee's own serious health condition. If your client's "paid leave" is a flexible bank that can be spent on vacation, it doesn't count. Period. Design it right first.

The State and Local Twist: Earn It, but Don't Double-Count

The WFTC added a nuance a lot of small firms (and their advisors) will get wrong: leave provided under state or local paid-leave mandates counts toward eligibility for the federal credit, but it does not count toward the credit calculation.

So if your client is in a state like California, Washington, or New York with its own paid family leave program, that state-mandated leave can help them satisfy the "we offer paid leave" eligibility test — but the federal credit is calculated only on wages the employer itself pays under its own written policy. You get eligibility credit for the mandate; you don't get to stack the state dollars into the federal calculation. Keep the two pools separate or you'll overstate the credit.

What This Means for Small Firms Right Now

August is the quiet-on-payroll part of the year for a lot of firms. That's exactly why this is the moment to move.

For your clients, this is a real, recurring credit. A firm with a handful of qualifying employees taking leave can see a multiple-thousand-dollar general business credit each year — against the backdrop of a benefit they should probably be offering for retention anyway. Paid leave is a talent weapon in a tight labor market. Now it's also a tax lever.

The premium method is the door-opener. The single biggest reason small firms skipped Section 45S was the wage-tracking burden. The new premium-based method collapses that complexity — you claim on premiums paid. That's tractable for a bookkeeping client. Push this one hard.

State-mandated states are the sleeper opportunity. In states with paid-leave mandates, eligibility is largely satisfied by the mandate itself, and the federal credit becomes a cleaner add-on for employer-paid premiums and supplemental leave. That combination wasn't available before 2026.

Action Items: What to Do This Quarter

Qualify the base. Run each small business client through the new eligibility: written policy, 2 weeks/50% minimum, 6-month service threshold, 20-hour part-timers. Flag the ones that already have a compliant policy — they may have retroactive credit available.

Decide wage vs. premium. For clients who buy PFML insurance, model both methods under Notice 2026-28 and elect the better one. The notice lays out the comparison and allocation rules — use them, don't guess.

Fix the policies. Any client whose paid leave isn't "specifically designated for FMLA purposes" needs a policy draft before year-end. This is a clean, high-value deadline to set with them now, not in January.

Watch for the regulations. This is Notice-level guidance; proposed regulations under Section 45S are coming, and comment is invited. Note the open questions now so you're not surprised when the regs land.

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Takeaway 1: Section 45S is permanent and expanded — 12.5%–25% credit, up to 12 weeks, now covering 6-month employees and 20-hour part-timers starting in 2026.

Takeaway 2: The new premium-based method makes the credit finally practical for small firms that buy PFML insurance — claim on premiums instead of chasing per-employee wage tracking.

Takeaway 3: State-mandated leave counts toward eligibility but not the credit calculation — separate the two pools, and design written policies to qualify before year-end.