Quick Answer: What Changed With the FMLA Tax Credit in 2026?

In 2026, the federal paid family and medical leave tax credit became more useful for employers because it was made permanent and expanded. The credit, known as the Section 45S Employer Credit for Paid Family and Medical Leave, allows eligible employers to claim a tax credit when they provide qualifying paid family and medical leave to eligible employees.

The biggest change is that employers may now claim the credit in one of two ways: based on wages paid to employees during qualifying leave, or based on certain insurance premiums paid for policies that provide paid family and medical leave benefits. This matters because HR teams no longer need to look at paid leave only as a compliance or benefits cost. In 2026, paid leave planning can also become part of workforce budgeting, employee retention, total rewards strategy, and tax planning.

The credit generally ranges from 12.5% to 25%, depending on the percentage of wages replaced during leave. The employer must have a written paid family and medical leave policy, provide at least two weeks of qualifying paid leave, and pay at least 50% of normal wages during leave. The One Big Beautiful Bill Act expanded Section 45S for taxable years beginning after December 31, 2025.

Why HR Teams Should Pay Attention in 2026

Paid leave has become a major workforce issue. Employees expect employers to support parental leave, caregiver leave, serious health condition leave, and other family-related absences. At the same time, employers are trying to control benefit costs, manage compliance, and retain employees in a competitive labor market.

The federal FMLA itself provides eligible employees of covered employers with unpaid, job-protected leave for qualifying family and medical reasons. It also requires group health benefits to continue under the same terms as if the employee had not taken leave. But unpaid leave is often not enough for employees who cannot afford weeks without income.

That is where paid leave policies come in. For HR teams, the extended tax credit creates a stronger business case for offering or improving paid family and medical leave. It does not replace FMLA compliance, state paid leave requirements, short-term disability, or company leave policies. Instead, it gives employers a potential federal tax benefit for providing qualifying paid leave that meets Section 45S requirements.

In practical terms, HR teams should treat 2026 as a year to review paid leave programs, update written policies, coordinate with payroll and tax teams, and determine whether current benefits are structured in a way that can qualify for the credit.

What Is the Section 45S Paid Family and Medical Leave Tax Credit?

The Section 45S credit is a federal general business credit for employers that provide paid family and medical leave to qualifying employees. The IRS describes it as a credit based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions.

Before the 2026 changes, the credit was temporary and had been extended multiple times. That uncertainty made it harder for employers to rely on the credit when designing long-term benefits programs. Under the 2026 update, the credit is now permanent, which means employers can plan around it more confidently. Mercer notes that the One Big Beautiful Bill Act made the federal paid family and medical leave credit permanent and improved it, particularly for employers that previously struggled to qualify under the old rules.

For HR leaders, the important point is not just that the credit exists. The important point is that paid leave policy design, eligibility language, wage replacement levels, insurance funding, payroll tracking, and documentation now affect whether the organization may be able to use the credit.

Key 2026 Changes HR Teams Need to Know

2026 Change	What It Means for HR
The credit is permanent	Employers can plan paid leave strategy beyond one tax year.
Employers can use a wage-based method	The credit may be based on wages paid during qualifying family and medical leave.
Employers can use an insurance-premium method	The credit may be based on premiums paid for qualifying insurance policies, such as policies used to provide paid family and medical leave benefits.
Employers must use one method consistently	Employers generally cannot mix wage and premium methods employee by employee.
State-mandated leave may count toward minimum leave requirements	However, the credit generally applies only to amounts above what state or local law requires.
Part-time employees may be included if they meet the hours requirement	The updated law refers to employees customarily employed for at least 20 hours per week.
Employers may elect a six-month employment requirement	Previously, the qualifying employee standard generally focused on one year of employment.

The 2026 law allows the credit to be calculated either on qualifying wages paid during leave or on qualifying insurance premiums paid or incurred during the tax year. The law also states that the rate of payment under an insurance policy is determined without regard to whether qualifying employees actually took leave during the year.

This is one of the most important changes for HR teams. Under the premium method, an employer may have a potential credit tied to the cost of maintaining a qualifying paid leave insurance policy, even if no employee uses leave in that tax year. Guardian also highlights that the premium-based credit can apply even if no employees take leave during the year.

How the Credit Works

The credit generally starts at 12.5% when paid leave replaces 50% of an employee’s normal wages. It increases by 0.25 percentage points for each percentage point by which the wage replacement rate exceeds 50%, up to a maximum credit of 25% when leave is paid at 100% of normal wages. The IRS describes this 12.5% to 25% structure for qualifying paid family and medical leave wages.

Here is a simplified way to understand it:

Wage Replacement During Leave	Potential Credit Rate
50% of normal wages	12.5%
60% of normal wages	15%
75% of normal wages	18.75%
100% of normal wages	25%

For HR teams, this means richer paid leave benefits may create a larger credit percentage. However, the calculation is not simply an HR exercise. Payroll, finance, tax, and benefits teams need to confirm which wages or premiums qualify, how leave is tracked, and whether any state or local paid leave amounts must be excluded from the credit calculation.

Example: How an Employer Might Use the Credit

Imagine a company offers six weeks of paid parental leave at 60% of normal wages. An eligible employee earning $1,500 per week takes six weeks of qualifying leave. The employer pays $900 per week during the leave period.

That equals $5,400 in paid leave wages. Because the leave replaces 60% of normal wages, the potential credit rate may be 15%. In this simplified example, the potential credit would be:

$5,400 × 15% = $810

This example is intentionally simplified. The actual credit depends on eligibility, written policy language, tax rules, state and local paid leave requirements, other credits claimed, and how the employer chooses to calculate the credit. Employers also need to reduce certain deductions by the amount of the credit, because the law includes no-double-benefit rules.

Who Qualifies as an Eligible Employee?

For 2026 planning, HR teams should pay close attention to which employees are covered by the policy and which employees qualify for credit purposes.

Under the updated rules, the written policy must provide at least two weeks of annual family and medical leave for qualifying full-time employees who have been employed for at least one year, or for not less than six months if the employer elects that standard. It must also provide prorated leave for part-time employees who customarily work at least 20 hours per week.

Compensation limits also matter. CohnReznick notes that, for a 2025 or 2026 family and medical leave credit, the annualized pay threshold is $96,000, based on 60% of the $160,000 highly compensated employee threshold.

For HR teams, this means eligibility for leave under the company policy and eligibility for the tax credit are not always the same thing. A company may offer paid leave to a broader group of employees, but only certain employees may count for the federal credit.

What Types of Leave Count?

The credit is connected to family and medical leave reasons similar to those under the FMLA. Qualifying reasons generally include:

• Birth of a child and care for the child
• Placement of a child for adoption or foster care
• Care for a spouse, child, or parent with a serious health condition
• The employee’s own serious health condition
• Certain military family leave reasons
• Care for a covered service member who is the employee’s spouse, child, parent, or next of kin

The IRS also makes clear that general vacation leave, personal leave, or sick leave that is not specifically designated for qualifying family and medical leave purposes does not count as family and medical leave for this credit.

This is a critical policy drafting issue. If an employer simply offers a broad PTO bank and employees can use it for any reason, that paid time off may not qualify for the Section 45S credit. HR teams should work with legal and tax advisors to ensure the paid leave policy specifically identifies qualifying family and medical leave purposes.

What the Written Policy Must Include

A written policy is central to claiming the credit. HR should not assume that an informal paid leave practice, manager-approved arrangement, or handbook paragraph is enough.

At minimum, the policy should address:

• Which employees are eligible
• The qualifying leave reasons
• The amount of paid leave available
• Wage replacement percentage
• Part-time employee proration
• Employment tenure requirement
• Coordination with FMLA, state PFML, PTO, sick leave, and disability benefits
• Anti-retaliation and non-discrimination protections
• Documentation and payroll coding requirements

The IRS states that an eligible employer’s written policy must provide at least two weeks of paid family and medical leave annually to full-time qualifying employees, prorated for part-time employees, and pay at least 50% of normal wages.

How State Paid Leave Laws Affect the Credit

Many employers now operate in states with paid family and medical leave programs. These programs are often funded through payroll contributions and may provide benefits directly to employees. For multistate employers, this can make leave coordination complicated.

The 2026 update is helpful because state or local mandated leave may count toward the minimum paid leave requirement. However, amounts paid by a state or local government, or amounts required by state or local law, generally do not count when calculating the federal credit. The credit is generally available only for employer-provided benefits above the state or local requirement.

For HR teams, this means the question is not simply, “Do we offer paid leave?” The better question is, “Do we provide paid leave above what the state already requires, and can we clearly document the employer-paid portion?”

Why This Matters for HR Strategy

The extended FMLA tax credit affects more than payroll tax reporting. It can influence how HR teams design benefits, communicate with employees, and support workforce planning.

First, it may help employers make the financial case for paid leave. Paid family and medical leave is often viewed as a cost center. The tax credit does not eliminate the cost, but it can offset a portion of qualifying wages or premiums.

Second, it can support retention. Employees facing childbirth, adoption, caregiving, military family needs, or serious health issues are at risk of leaving the workforce if they cannot afford unpaid leave. Paid leave can help employees stay connected to their employer during major life events.

Third, it can improve benefits competitiveness. In industries where talent competition is high, paid leave can differentiate an employer from competitors that offer only unpaid FMLA leave.

Fourth, it forces better leave administration. To claim the credit, employers need clear policies, accurate payroll codes, and strong documentation. That can improve overall leave management.

HR Action Plan for 2026

HR teams should take the following steps in 2026:

1. Review current leave policies.
   Check whether your organization has a separate paid family and medical leave policy or only a general PTO, sick leave, parental leave, or disability policy.
2. Identify qualifying leave categories.
   Make sure leave is specifically connected to qualifying family and medical leave reasons.
3. Confirm wage replacement levels.
   The credit starts when leave is paid at least 50% of normal wages. Higher wage replacement may increase the credit percentage.
4. Coordinate with payroll.
   Payroll systems should be able to identify qualifying leave wages separately from PTO, sick leave, vacation, state-paid benefits, and non-qualifying leave.
5. Review insurance policies.
   If the company uses short-term disability, paid family leave insurance, or similar coverage, determine whether the premium method may be available.
6. Map state leave requirements.
   For multistate employers, identify where paid leave is required by state or local law and what benefits the employer provides above those requirements.
7. Involve tax and legal advisors early.
   HR should not make the credit determination alone. The credit is a tax issue that depends on policy design, payroll data, employee eligibility, and tax reporting.
8. Prepare documentation.
   Keep written policies, payroll records, leave approvals, wage replacement details, insurance premium invoices, and state leave coordination records.

Common Mistakes to Avoid

One common FMLA mistake is assuming all paid leave qualifies. General PTO usually does not qualify if employees can use it for any reason.

Another mistake is ignoring state-mandated paid leave. Employers may not be able to claim the federal credit on leave amounts required by state or local law.

A third mistake is failing to update written policy language. The policy should clearly identify qualifying leave reasons, wage replacement, covered employees, and anti-retaliation protections.

A fourth mistake is leaving payroll out of the process. If payroll cannot separate qualifying paid family and medical leave from other wage payments, the employer may struggle to document the credit.

A fifth mistake is treating the credit as only a tax department issue. HR owns the policy, benefits owns plan design, payroll owns wage tracking, and tax owns the final credit calculation. All teams need to work together.

What This Means for Small and Mid-Sized Employers

For small and mid-sized employers, the permanent credit may be especially valuable. Many smaller employers want to offer paid leave but worry about cost, staffing coverage, and administrative complexity. The expanded credit does not solve every challenge, but it may make paid leave more financially realistic.

The premium-based option may also be attractive for employers that use insurance products to fund leave benefits. Instead of waiting for an employee to take leave, the employer may be able to evaluate the credit based on qualifying premiums paid for coverage during the tax year, subject to the rules.

For HR teams at smaller companies, the best first step is to review current benefits and ask a simple question: “Are we already paying for leave benefits that could qualify if our policy and documentation were improved?”

Final Takeaway

The extended FMLA tax credit in 2026 gives HR teams a stronger reason to revisit paid family and medical leave. The credit is now permanent, more flexible, and potentially more accessible to employers that structure their policies correctly.

However, the opportunity comes with responsibility. Employers need clear written policies, accurate payroll tracking, careful coordination with state leave laws, and collaboration between HR, benefits, payroll, finance, and tax advisors.

For HR leaders, the message is clear: paid leave is no longer just a compliance issue or employee relations benefit. In 2026, it is also a strategic workforce investment that may come with a measurable federal tax advantage.

FAQs About the Extended FMLA Tax Credit in 2026

1. What is the extended FMLA tax credit?

The extended FMLA tax credit is the Section 45S Employer Credit for Paid Family and Medical Leave. It allows eligible employers to claim a federal tax credit for qualifying paid family and medical leave wages or, under the 2026 expansion, certain qualifying insurance premiums.

2. Is the FMLA tax credit permanent in 2026?

Yes. The One Big Beautiful Bill Act made the Section 45S paid family and medical leave credit permanent and expanded it for taxable years beginning after December 31, 2025.

3. How much is the paid family and medical leave tax credit?

The credit generally ranges from 12.5% to 25%, depending on the percentage of normal wages replaced during leave. Leave paid at 50% of wages generally starts at a 12.5% credit rate, while leave paid at 100% of wages may qualify for a 25% credit rate.

4. Can employers claim the credit for insurance premiums?

Yes. Beginning in 2026, employers may be able to claim the credit based on qualifying insurance premiums paid or incurred for policies that provide paid family and medical leave benefits. Employers generally must choose either the wage method or the premium method.

5. Does regular PTO qualify for the FMLA tax credit?

Usually, no. General PTO, vacation, personal leave, or sick leave does not qualify unless it is specifically designated for qualifying family and medical leave purposes and meets the Section 45S requirements.

6. What should HR teams do first?

HR teams should review their written leave policies, confirm whether paid leave is specifically designated for qualifying family and medical leave reasons, check wage replacement levels, coordinate with payroll, and consult tax advisors before claiming the credit.