Section 45S Paid-Leave Tax Credit Is Now Permanent — And Easier to Claim

Tax law changes are usually slow-moving. This one just got a green light for small-business owners to actually use it.

On August 5, 2026, the Treasury Department and IRS released Notice 2026-28, the first substantive guidance on how the Section 45S paid family and medical leave (PFML) credit works now that it's permanent. The credit itself isn't new — it dates back to the 2017 Tax Cuts and Jobs Act — but it used to expire every couple of years, which discouraged employers from building it into long-term planning. The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, removed the expiration date entirely and expanded who qualifies. This week's notice is where the IRS fills in the "how do we actually calculate this" details employers and accountants have been waiting on.

What the credit is worth

Section 45S is a general business tax credit — meaning it reduces a company's tax bill dollar-for-dollar, not just its taxable income — available to employers with a written policy that pays employees at least half their normal wages during family or medical leave.

Starting with tax years beginning after December 31, 2025, the credit runs 12.5% to 25% of qualifying wages, for up to 12 weeks of leave per employee per year. The percentage isn't fixed: it starts at 12.5% if the employer's policy pays exactly 50% of normal wages during leave, and climbs 0.25 percentage points for every additional percentage point of wage replacement above that, topping out at 25% once the policy pays full wages. A policy that replaces 70% of wages, for example, lands at a 17.5% credit rate.

One important offset: if a company claims this credit, it has to reduce its wage-expense deduction by the same amount. There's no double benefit for the same dollars.

The new part: a "premium method"

Previously, employers calculating the credit had to track actual wages paid to each employee while out on leave — a real administrative burden for a small business. Notice 2026-28 confirms a second option, written into the OBBBA: a premium method, where the credit is instead based on premiums the employer pays for a qualifying PFML insurance policy, regardless of whether any employee takes leave that year.

For a small employer that already buys a PFML insurance rider, this is a meaningfully simpler path — no per-employee leave tracking required. The notice does draw some lines: premiums that fund leave required by state or local law, leave paid by a government program, or coverage for someone who isn't a "qualifying employee" don't count toward the credit. Employers can mix methods — wage method for some leave, premium method for other leave — but the same instance of leave can't generate a credit twice.

Who counts as a "qualifying employee" now

The notice also confirms two eligibility expansions from the OBBBA that widen the pool of employees a policy can cover:

• Service requirement cut from one year to six months. Employers can now choose to extend eligibility to newer hires.
• Part-time threshold set at 20 hours per week. Employees who previously fell outside "full-time enough" policies can now be included.

Highly compensated employees remain excluded under the underlying statute's compensation cap — a rule this notice didn't change. Because the exact dollar threshold adjusts periodically, that detail is worth confirming with a tax professional for any specific payroll.

What's still unsettled

A few things this notice doesn't resolve. The IRS hasn't yet issued proposed regulations; for now, employers may rely on Notice 2026-28 itself as interim guidance. It's also genuinely unclear how a business owner with no W-2 employees other than themselves — a common structure for solo entrepreneurs — should think about claiming this credit for their own leave. None of the primary guidance released so far addresses that scenario directly, and secondary commentary is mixed. Treasury has also opened a public comment period, running through October 16, 2026, specifically asking about how to allocate premiums that cover both qualifying and non-qualifying leave.

Treasury Secretary Scott Bessent framed the update as aimed at smaller employers: "The Working Families Tax Cuts permanently expands the federal Paid Family and Medical Leave Tax Credit, giving businesses, especially small businesses, greater incentives to provide paid leave." IRS Chief Executive Frank Bisignano added that the changes "will make more employers eligible for the credit and give them more ways to offer this benefit to their workers."

Why this matters beyond the balance sheet

For AskProsper readers who are also business owners — a common overlap with active investors and options traders — this is a reminder that tax planning isn't only about capital gains and contribution limits. A permanent, better-defined federal credit changes the math on whether offering paid leave is worth it for a small company, and the premium-method option removes a real administrative barrier that kept some employers from claiming the credit at all in years past.

This is a technical, business-side tax question with a lot of moving parts — the written-policy requirements, the wage/premium election, and the compensation cap all interact. Anyone weighing whether to adopt or adjust a paid-leave policy should work through the specifics with a qualified tax professional rather than treating any of the above as a one-size-fits-all answer.

This article is educational commentary on public tax guidance, not personalized investment, trading, or tax advice.