Could Your Paid Leave Policy Now Create a Bigger Tax Opportunity?
If your business offers paid family or medical leave, recent federal changes may make that benefit more valuable from a tax planning perspective. The IRS has outlined several 2026 enhancements to the employer tax credit for paid family and medical leave, including broader employee eligibility and a new option for calculating the credit.
For business owners, the bigger question is not simply what changed. It is whether those changes create an opportunity worth reviewing before year-end.
Could your business qualify now when it did not before?
Eligibility for the credit has expanded. According to the IRS, businesses may now be able to claim the credit for employees with at least six months of service and for certain part-time employees working 20 hours or more per week. The credit has also been made permanent, giving employers more certainty when considering paid leave as part of a longer-term employee benefits strategy.
That means businesses that looked at the credit in prior years and decided they did not qualify may want to take another look. Changes in employee tenure, work schedules, or the way leave benefits are structured could affect eligibility under the updated rules.
Review the IRS overview of the enhanced Paid Family and Medical Leave Tax Credit
How is your business paying for leave?
The updated rules also give employers more flexibility in how the credit may be calculated.
Businesses may be able to use a wage-based method, based on qualifying wages paid while an employee is on family and medical leave, or a premium-based method, based on qualifying premiums paid for an insurance policy that provides the leave benefit.
For employers, this makes the structure of the benefit more important. A company paying employees directly during leave may approach the credit differently from a business that provides the benefit through an insurance policy.
The IRS’s Notice 2026-28 provides additional guidance on the two approaches, including how qualifying premiums are allocated and how an employer elects between the premium and wage methods.
What should you review before claiming the credit?
The updated credit creates a good reason to look at the records behind your leave program, not just the policy itself. Employers may want to review which employees are covered, how long they have worked for the company, whether they meet applicable work-hour requirements, and whether paid leave is funded through wages or insurance premiums.
Businesses operating under state or local paid leave requirements should pay particular attention. The IRS says leave provided under a state or local mandate may count toward determining eligibility for the federal credit, although that mandated leave does not count toward the actual credit calculation.
That distinction can make documentation especially important. Understanding which benefits are voluntary, which are legally required, and how each is funded can help a business and its tax professional evaluate whether the federal credit may apply.
A tax credit worth revisiting
For employers already offering paid family or medical leave, these 2026 changes may create opportunities that were not available under the previous rules. Even businesses that reviewed the credit in the past may benefit from reassessing eligibility now that the program is permanent and covers a broader group of employees.
At Phoenix Accounting, we help individuals and business owners stay organized, maintain accurate financial records, and prepare for tax season with greater confidence. If you have questions about your bookkeeping, tax documents, or financial records, click here to contact us for expert support.
This article is for general informational purposes only and is not intended as tax, legal, or cybersecurity advice.