The One Big Beautiful Bill Act (OBBBA) made the employer credit for paid family and medical leave permanent for tax years beginning after December 31, 2025. That means beginning with 2026 tax years, the credit is no longer a temporary incentive. It is a long-term planning opportunity for employers that offer qualifying paid family and medical leave benefits.
Now that we are part way through 2026, employers should take a fresh look at their paid leave policies, payroll coding, insurance arrangements and documentation to confirm they are positioned to claim and support the credit.
Two Ways to Calculate the Credit
Starting in 2026, employers can calculate the credit one of two ways:
- Based on qualifying paid leave wages, or
- If a paid leave insurance policy is in place, based on the insurance premiums paid.
The premium-based option may apply even if no employees take leave during the year, making it important for employers to review and calculate whether their insurance arrangements could result in a higher credit. It is important to note that the wage or premium expense deductible for federal income tax purposes is reduced by the amount of the credit.
Credit Rate and Policy Requirements
The credit rate remains 12.5% to 25%, depending on how much pay is provided while the employee is on leave. To stay eligible, employers must confirm they have a written paid leave policy that meets the requirements, including at least 50% pay replacement and required employee protections.
Employers should also revisit which employees qualify under the updated 2026 rules before assuming a participant or leave type is eligible.
Credit Calculation Illustrations
A. Assume an employee’s normal weekly wages are $800. The employee takes 8 weeks of qualifying family and medical leave, and the employer pays 100% of normal wages.
Under the qualifying paid leave wage credit calculation, the credit would be:
$800 x 100% wage replacement percentage x 8 weeks x 25% (credit rate for paying 100% of wages) = $1,600 credit
B. Assume the employer pays $12,000 in 2026 premiums for a policy that provides 50% wage replacement for qualifying family and medical leave.
Using the insurance premiums based credit, the credit would be:
$12,000 x 50% wage replacement percentage x 12.5% (credit rate for paying 50% of wages) = $1,500
Payroll and Compliance Considerations
From a payroll and compliance standpoint, documentation matters. Payroll systems should clearly track only the leave types that qualify for this credit. Vacation, personal leave and general sick leave do not qualify.
Additionally, wages paid to satisfy state or local paid leave requirements, or paid by a state or local government, cannot be used when calculating the credit. Employers must coordinate with state or local paid leave programs to ensure only eligible wages are included in the credit calculation.
Documentation to Keep
To support the credit, employers must keep solid documentation, including:
- The written paid leave policy
- Employee eligibility details
- Qualifying wages
- Eligible insurance premiums
- Credit calculations and supporting records
- Payroll coding and tracking reports
Planning takeaway: A quick check-in on 2026 paid leave policies, payroll coding, insurance arrangements, documentation and year-to-date activity can help confirm whether your business is set up to claim and support the credit.
Next Steps
If you would like help reviewing your policy, deciding between the wage-based and premium-based options, or validating your payroll and documentation process, connect with your advisor.