What Is the Section 45S Paid Family and Medical Leave Credit?
For years, the federal tax credit for employers who offer paid family and medical leave (PFML) was a temporary provision that Congress had to keep renewing, which made it hard for business owners to plan around. The Working Families Tax Cuts changed that: the Section 45S credit is now permanent, and the IRS issued Notice 2026-28 on August 5, 2026, to explain how the expanded version works. Employers who offer up to 12 weeks of paid leave for a qualifying employee’s serious health condition, or to care for a family member with one, can generally claim a credit worth 12.5% to 25% of wages paid during that leave.
What Changed With the New Guidance
More Employees Now Count
The permanent version of the credit widens who an employer can claim it for. Employees only need six months of service to qualify, rather than a full year, and part-time employees who customarily work 20 hours or more per week are now eligible too. For a small business that leans on part-time staff — a professional office, a retail shop, a growing consulting firm — that is a meaningful expansion of which payroll dollars can actually generate a credit.
A New Way to Claim the Credit: Insurance Premiums
Beginning in 2026, employers are no longer limited to claiming the credit based on wages paid during leave. Notice 2026-28 also allows employers to claim the credit based on premiums paid for a PFML insurance policy, and it walks through how to allocate qualifying premiums and how to elect between the premium-based method and the wage-based method. That gives employers who buy a PFML insurance product, rather than self-funding leave payments, a clear path to the same tax benefit. The IRS has noted that more detailed proposed regulations are still coming, so this is a good area to revisit as guidance develops.
How State-Mandated Leave Fits In
Employers operating in a state or locality with its own paid-leave mandate — Colorado’s program being a familiar example for our Denver clients — can count that mandated leave toward eligibility for the federal credit, but not toward the credit calculation itself. In practice, that means a Colorado employer already complying with state law does not automatically get a bigger federal credit just because the state requires the leave; the actual credit is still based on the employer’s own qualifying wage or premium payments under the federal rules. Texas has no equivalent state mandate, so Houston and the Woodlands employers offering PFML are typically doing so voluntarily, which is exactly the kind of benefit this credit is designed to encourage.
What Houston, The Woodlands, and Denver Employers Should Do Now
If your business already offers paid family or medical leave, or has been considering it, this is a good time to put a written PFML policy in place, since a qualifying written policy is generally a prerequisite for claiming the credit. It is also worth deciding early whether the wage-based or premium-based method makes more sense for your payroll and benefits setup, and confirming that any part-time staff who now qualify under the lower service and hours thresholds are being tracked correctly. Employers in Colorado should also make sure their state FAMLI compliance and their federal credit calculation are being handled as the separate obligations they are, so nothing gets double-counted or missed.
At Petry Tax & Advisory, we help business owners in Houston, the Woodlands, and Denver turn guidance like this into an actual plan — from setting up a compliant PFML policy to deciding how to claim the credit on your return. If you want help figuring out whether this credit makes sense for your business, we would welcome the chance to talk it through in a consultation.
This post is for general informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional about your specific situation.
lucy.petry@petrylawfirm.com
