Enhanced Paid Family & Medical Leave Tax Credit | Ohio CPA Firm | GBQ Partners

In a recent tax tip, the IRS reminded employers, including small businesses,  that offering paid family and medical leave (PFML) to their employees directly, or through a short-term disability insurance plan, may earn them a valuable federal tax credit. Several enhancements enacted into law in 2025 have made the credit permanent and expanded who can claim it and how.

If your business already provides paid family and medical leave or is considering it, the enhanced credit may now be worth a closer look than it was in prior years.

What The Credit Is

The employer credit for paid family and medical leave is a general business tax credit worth between 12.5% and 25% of the wages paid to qualifying employees while they are on leave, for up to 12 weeks of leave per taxable year. The credit percentage is tied to how much of an employee’s normal wages the employer replaces during leave: it begins at 12.5% when the employer pays 50% of normal wages (the minimum required for the leave to qualify)  and increases by 0.25 percentage points for each additional percentage point of wages replaced, reaching the maximum of 25% when the employer pays 100% of normal wages.

Employers can offer the leave for a range of family and medical reasons, including:

  • Having a baby, or adopting or fostering a child.
  • Caring for the employee’s own serious health condition, or that of a spouse, child, or parent.
  • Handling a qualifying situation arising from a close relative’s covered active-duty military service.
  • Caring for a close relative who is seriously ill or an injured covered service member.

What’s New

Several enhancements make the credit more broadly available beginning in 2026:

  • The credit is now permanent. Previously a temporary provision, it is no longer set to expire, giving employers a durable reason to build paid leave into their benefits.
  • Expanded eligibility. Employers can now claim the credit for employees with as little as six months of service (down from one year) and for part-time employees who work 20 or more hours per week.
  • Expanded coverage. Employers can claim the credit based on insurance premiums paid to provide leave, in addition to the wages paid during leave.
  • State & local mandates. Leave provided under a state or local mandate can count toward eligibility for the federal credit, though it generally cannot be included when calculating the credit amount.

Two Ways To Claim It

The enhancements give employers two methods for claiming the credit:

  • Premium-based method (new). Based on qualifying premiums the employer paid for PFML insurance policies.
  • Wage-based method. Based on the wages paid while the employee is on paid family and medical leave.

The IRS addressed the new premium-based approach in Notice 2026-28, which compares the two methods, explains how to allocate qualifying premiums, and describes how to elect between them. Choosing the right method and coordinating  it with any insured leave program you already have can meaningfully affect the size of the credit.

Who Should Take A Look

The expanded rules make this a timely conversation for a broad set of employers, particularly:

  • Businesses that offer, or are weighing whether to offer, paid family and medical leave.
  • Employers that already provide the benefit but haven’t claimed the credit in the past.
  • Employers that fund leave through an insurance policy and may now benefit from the premium-based method.
  • Employers with part-time or shorter-tenure workforces that were previously outside the credit’s reach.

What To Do Now

  • Review your written leave policy to confirm it meets the credit’s requirements for qualifying employees and leave.
  • Evaluate how your business pays the employee on leave;  both paying wages directly and paying short-term disability insurance premiums now qualify.
  • Confirm eligibility for your newly covered employees, including part-time and six-month-tenure workers.
  • Coordinate with payroll and benefits so that qualifying wages and premiums are tracked and documented.
  • Plan for Form 8994, which employers use to figure and claim the credit as part of the general business credit.

GBQ can help you assess eligibility, compare the wage-based and premium-based methods, and position your leave program to capture the credit. Please reach out to discuss how the enhanced credit applies to your business.

This article is based on IRS Tax Tip 2026-64 and related IRS guidance, including Notice 2026-28, and is provided for general informational purposes. It does not constitute tax advice. Eligibility for and the amount of the credit depend on your specific facts; please consult your GBQ advisor before acting.