Section 45S now gives an employer two ways to compute the paid family leave credit. The first is the familiar one, a percentage of the wages paid to a qualifying employee who is out on leave. The second is a percentage of the premiums paid on an insurance policy covering that leave. It arrives with a sentence worth reading twice. It reads: "the rate of payment under the insurance policy shall be determined without regard to whether any qualifying employees were on family and medical leave during the taxable year."
That is section 45S(a)(3), added by the 2025 amendments and explained in Notice 2026-28, released August 5, 2026. The rate that sizes the premium credit does not ask whether anyone took leave this year. Most owners picture the opposite, wages going out the door while someone is home with a newborn. So what does that sentence do?
Picture the owner of a 70 person HVAC and plumbing company outside Orlando. A crew lead went out last spring for surgery and a long recovery. She kept him on payroll at part of his normal pay. He trains everyone else in the shop. She was not going to be the reason his family missed a mortgage payment. Nothing about that arrangement is written down. No policy in the handbook, no insurance product behind any of it. There is her, and a payroll decision she made on a Tuesday.
She has heard there is a federal credit for paid leave. She filed it with the things that apply to companies with an HR department and a benefits binder. The leave kept getting paid either way.
Whether that credit reaches her business turns on three questions. Not one of them is the sentence she just read. Does she have a written leave policy of the kind section 45S requires? Do her crew leads count as qualifying employees under the rules that changed for 2026? And does the way she pays for leave fit the new premium basis at all?
Section 45S became permanent on July 4, 2025, when the amendments in section 70304 of Pub. L. 119-21 struck its expiration date. What arrived on August 5, 2026 is guidance, not a new law: Notice 2026-28 explains the amended rules, which apply to taxable years beginning after December 31, 2025. The credit now has two computation bases, wages paid during leave or premiums paid on a leave insurance policy, and for the premium basis the statute determines the rate of payment without regard to whether any qualifying employees were on family and medical leave during the taxable year. Everything else still stands, from the written policy requirement to the limits on what counts as creditable coverage. Proposed regulations are still to come, and taxpayers may rely on the notice for taxable years beginning after December 31, 2025 until those regulations are issued.
What Is the Section 45S Paid Family Leave Tax Credit?
The section 45S paid family and medical leave credit is worth 12.5 percent to 25 percent of wages paid to qualifying employees for up to 12 weeks of family and medical leave per taxable year, and it has been permanent since July 4, 2025. Section 13403 of the Tax Cuts and Jobs Act, Pub. L. 115-97, added it in December 2017. It applied to wages paid in taxable years beginning on or before December 31, 2019. Congress pushed that date back twice, and the 2025 amendments struck it out of the code altogether. Permanence here means an expiration date that stopped existing.
Eligible employers figure the credit on Form 8994, Employer Credit for Paid Family and Medical Leave. Section 45F, the employer childcare tax credit, got its own 2026 rewrite. Different credit, different rules.
The two IRS documents behind the current rules do not call the law by the same name. IR-2026-86 credits the "Working Families Tax Cuts." Notice 2026-28, implementing the same amendments, cites "section 70304 of Pub. L. 119-21 ... (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA)."
What Written Leave Policy Does the 45S Credit Require?
The credit requires a written policy in place that provides every qualifying employee who is not a part-time employee not less than 2 weeks of annual paid family and medical leave, at a rate of payment not less than 50 percent of the wages normally paid to that employee for services performed for the employer.
Part-time here is a defined term. Section 45S borrows it from section 4980E(d)(4)(B), which means customarily employed for fewer than 30 hours per week. That is a separate line from the 20 hour floor below. Part-time employees get a proportionate amount under section 45S(c)(1)(A)(ii). The ratio is their expected hours over the hours an equivalent qualifying employee is expected to work.
Written is the load-bearing word. An employer who pays generously during leave and has nothing on paper is not an eligible employer for this credit. No reconstruction after the fact fixes that. A handbook page saying the company will do right by people is not that policy either. This is the gate the Orlando owner is standing behind without knowing it. She does not meet the requirement, because the requirement is a document.
Which Employees Qualify for the 45S Credit in 2026?
For a 2026 tax year, a qualifying employee is one who has been employed by the employer for 1 year or more (or not less than 6 months, if the employer elects that), whose compensation for the preceding year on an annualized basis did not exceed $96,000, and who is customarily employed for not less than 20 hours per week.
That $96,000 is a 2026 tax year figure. It is 60 percent of the section 414(q)(1)(B) amount for the preceding year. Notice 2024-80 set that amount at $160,000 for 2025.
The six-month election and the 20 hour floor are both new for 2026. IR-2026-86 lists "Expanded Eligibility: Employers can claim the credit for employees with six months of service and for part-time employees customarily working 20 hours or more per week." Notice 2026-28 says the same amendment modified the definition of a qualifying employee "to limit that definition to employees customarily employed for not less than 20 hours per week."
Expanded, and limit. The six-month election lets an employer reach people it could not reach before. The 20 hour floor did not exist before the amendments. Anyone under it now sits outside the definition.
| Provision | Before the 2025 amendments | 2026 tax years onward |
|---|---|---|
| Minimum employment length | 1 year | 1 year, or 6 months if the employer elects |
| Weekly hours requirement | None (the requirement did not exist) | Customarily employed at least 20 hours per week |
| Basis for computing the credit | Wages paid during a qualifying leave period only | Wages paid during leave, or insurance premiums paid under a qualifying leave policy |
How Does the New Section 45S Premium Method Work?
The premium method computes the section 45S credit on the premiums an employer pays for an insurance policy providing paid family and medical leave that is in force during the taxable year, at the same applicable percentage that would apply to wages, instead of on wages paid during an actual leave.
Run it on the Orlando shop. She buys a policy covering paid family and medical leave for her crew. Say the policy pays at the statutory floor, 50 percent of normal wages. Her applicable percentage is 12.5 percent. Section 45S(a)(2) adds 0.25 percentage points for every point the rate of payment runs above that floor. A policy paying 100 percent of wages reaches the 25 percent ceiling. The policy stays in force all year. Nobody takes leave. Section 45S(a)(3) sets her rate of payment from the policy's terms, without regard to whether any qualifying employees were on family and medical leave during the taxable year.
The credit prices the policy, not the year's leave.
None of which makes the premium creditable on its own. A premium is not creditable if it covers:
- leave that would not be paid family or medical leave under section 45S(e)
- leave payable to someone who is not a qualifying employee when the premium is paid
- leave "required by state or local law or paid for by a state or local government"
- a benefit that would not be wages under section 45S(g)
An employer allocates a blended premium by a reasonable method, applied consistently and supported by contemporaneous records. The wage method and the premium method can both appear on one return, never on the same instance of leave. Section 280C(a) denies a deduction for premium dollars equal to the credit.
Does State or Local Leave Count Toward the 45S Credit?
Leave that is paid by a state or local government, or required by state or local law, counts toward the amount of paid family and medical leave the employer provides, and does not count toward the credit itself under subsection (a).
IR-2026-86 puts the same split in plainer words: employers "can count leave provided under state or local mandates toward the eligibility for this federal tax credit, but not toward the credit calculation." Section 45S(c)(4) is where the split lives. A premium buying coverage for state or locally mandated leave is not creditable. Which state requires what is a question for that state's statute, not for section 45S.
The Premium Method Does Not Remove the Other Gates
Read 45S(a)(3) again and notice how narrow it is. It governs one thing, how to determine the rate of payment when the credit is computed on premiums instead of wages. It is a routing instruction. It tells an employer which basis to compute the credit on, and it stops there. It says nothing about the written policy, and nothing about which employees are qualifying employees. It says nothing about whether the premium bought creditable coverage in the first place.
An employer reads that sentence as permission and buys a policy. The policy covers people who are not qualifying employees, or leave already required by state law. That employer has bought something real. It is not a creditable premium, and nothing in the notice fixes that afterward. The sentence that reads like a shortcut is a sorting rule. The sorting happens before the credit does.
The year's leave activity is irrelevant to the rate of payment under the premium basis. The written policy is not. The qualifying employee rules are not. The four coverage tests in Notice 2026-28 are not. They decide whether the premium counts at all, before any percentage touches it.
Back to the Orlando shop. The sentence she read is real. The rate of payment under her insurance policy would be determined without regard to whether any qualifying employees were on family and medical leave during the taxable year. It also does exactly one job, and it never touched the three questions she has to answer.
Does she have a written leave policy? Not today. That is the first thing to fix, because 2 weeks at not less than 50 percent of normal wages is a document, not an intention. Do her crew leads count as qualifying employees for 2026? A year of service, or six months if she elects it, at least 20 hours a week, and prior year compensation under the ceiling. She can check all three against her own payroll file. Does the premium basis fit how she funds leave? Only if the policy she buys covers leave the statute recognizes, for people the statute counts.
The written policy is the one piece of this an owner controls outright. Until it exists on paper, the rest of section 45S has nothing to attach to.
Frequently Asked Questions
No. Section 45S has been in the code since December 2017, and it became permanent on July 4, 2025. What is new in 2026 is the guidance, Notice 2026-28, and the amended rules it explains, which apply to taxable years beginning after December 31, 2025.
It is the second way to compute the credit: on the premiums an employer pays for an insurance policy providing paid family and medical leave that is in force during the taxable year, instead of on wages paid during an actual leave. Premiums buying coverage the notice excludes are not creditable.
Yes. The policy has to provide a qualifying employee who is not a part-time employee not less than 2 weeks of annual paid family and medical leave, with a proportionate amount for part-time employees, at a rate of payment not less than 50 percent of the wages normally paid to that employee.
Employees with 1 year of service, or 6 months if the employer elects it, who are customarily employed for not less than 20 hours per week, and whose annualized compensation for the preceding year did not exceed $96,000 for a 2026 tax year. That ceiling is 60 percent of the section 414(q)(1)(B) amount and it moves with the year.
It counts toward the amount of paid family and medical leave the employer provides, and it does not count toward the credit calculation under subsection (a). A premium buying coverage for that leave is not creditable either.
Sources
- Internal Revenue Service, IR-2026-86, Treasury, IRS Issue Guidance on the Permanent Expansion of Paid Family and Medical Leave under the Working Families Tax Cuts, August 5, 2026.
- Internal Revenue Service, Notice 2026-28, Guidance on the employer credit for paid family and medical leave under section 45S.
- Internal Revenue Code Section 45S, current text including the amendments made by section 70304 of Public Law 119-21 (July 4, 2025).
- Internal Revenue Service, Notice 2024-80, 2025 retirement plan cost-of-living adjustments, for the section 414(q)(1)(B) threshold.
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