New 2026 guidance gives small businesses more ways to qualify for the PFML credit, including insurance premiums, part-time staff and some state-mandated leave.
Why this matters for small employers
The IRS and Treasury have issued Notice 2026-28, giving employers clearer rules for the paid family and medical leave tax credit under Section 45S. For small businesses, the practical shift is that paid leave can now be treated as a tax-credit strategy, not just a benefits expense. The notice says the credit was made permanent and expanded by the Working Families Tax Cuts, and it can now be claimed by eligible employers using either wages paid during leave or premiums paid for PFML insurance.
That matters because the credit is part of the general business credit under Section 38. In plain terms, employers that already offer leave, or are considering adding it, may be able to offset part of the cost instead of absorbing the full expense. The IRS says the credit is available for up to 12 weeks of family and medical leave, and the rate ranges from 12.5% to 25% of wages paid to qualifying employees, depending on the circumstances described in the guidance.
What changed in the eligibility rules
The biggest expansion for many small businesses is who can count as a qualifying employee. The notice says employers can now include workers customarily employed for at least 20 hours per week, and they can elect to include employees after six months of service instead of waiting a full year. That is especially relevant for restaurants, retailers, agencies, home-service companies and other employers that rely on part-time or newer staff.
The guidance also says employers can count leave provided under state or local mandates when determining whether they provide enough PFML to be an eligible employer. That does not increase the federal credit amount itself, but it can help a business clear the eligibility threshold. For owners operating in states with leave requirements, that is a useful planning point: mandated leave may support qualification even if it does not boost the calculation.
Premium-based planning may be the cleaner path
Notice 2026-28 also confirms a new premium method for employers that maintain PFML insurance. Under that approach, the credit is based on premiums paid or incurred for the policy, rather than wages paid while employees are actually on leave. The IRS says the premium method’s rate calculation is determined without regard to whether any qualifying employees took leave during the year, which makes it potentially easier to budget and model in advance.
That predictability is the main business opportunity in the guidance. Employers with stable insurance arrangements may be able to treat PFML as a planned operating cost with a tax offset, rather than waiting for leave events to occur before knowing whether any credit is available. The IRS says employers can choose between the premium method and the wage method, and the notice explains how to compare them, allocate qualifying premiums and elect between the two.
Compliance and tax modeling still matter
The guidance also creates a caution for owners and bookkeepers. The notice says no deduction is allowed for the portion of PFML insurance premiums that generate the Section 45S credit, so businesses need to model the net tax result rather than assuming a double benefit. Treasury and the IRS also say they intend to issue proposed regulations, and they are requesting comments on issues including premium allocation, state-facilitated voluntary PFML programs and what counts as a substantial and legitimate business reason for not having a compliant written policy.
For small businesses, the immediate takeaway is simple: if you already offer paid leave, use part-time staff, or buy PFML insurance, this guidance may open a cleaner route to the federal credit. The strongest move now is to document employee service time, hours worked, policy terms, premium allocation and any state-mandated leave carefully so the business can evaluate the credit without overclaiming before the rules are finalized.
