Starting in 2026, employers will permanently be afforded a federal tax credit for paid family and medical leave (PFML), courtesy of the One Big Beautiful Bill Act (OBBBA). Previously, the PFML tax credit was a temporary provision of IRC Section 45S. The new legislation expands and clarifies how credit can be claimed.
Employers with state or locally mandated leave requirements also may now capture federal credit on leave that exceeds its applicable mandated threshold. While the Family and Medical Leave Act (FMLA) requires certain employers to provide employees with job-protected leave, it’s important to note that there is no federal obligation for employers to compensate employees during the leave period.
Effective January 1, 2026, employers with a written policy that provides qualifying employees with at least two weeks of annual PFML, paid at a rate of at least 50% of regular wages, may choose between two methods for calculating a tax credit amount. The wages-paid calculation method uses 12.5% of a qualifying employee’s wages paid during leave, and increases in increments of 0.25% per percentage of wages that exceed the 50% of regular wage threshold, up to 25%.
The premium-based method was newly established within the OBBBA, and determines the credit based on the premiums paid for qualifying family and medical leave insurance policies, like short-term disability coverage. Employers that opt for this method can claim the credit regardless of if the employee has taken PFML leave, so long as the qualifying insurance policy is maintained. Similar to the wages-paid calculation methodology structure, the credit amount will range between 12.5-25% of the employer-paid portion of applicable insurance premiums.
Further guidance is expected to provide employers with more information on PFML applications and requirements.
