WELTMAN: IRS Issues Guidance on Family and Medical Leave Tax Credit for Employers

By SBE Council at 17 August, 2026, 12:09 pm

By Barbara Weltman –

Federal law doesn’t require any employer to pay for family and medical leave. The Family and Medical Leave Act (FMLA) mandates that employers with 50 or more employees offer unpaid leave. Many states have their own rules about family and medical leave, with more than a dozen states requiring paid leave. But employers that pay for this leave—whether or not required by state law—may be able to claim a federal tax credit entitled the Employer Credit for Paid Family and Medical Leave.

History of the Credit

 The Tax Cuts and Jobs Act of 2017 created a temporary credit for employers paying for family and medical leave. The credit was extended several times. The One Big Beautiful Bill Act of 2025 (OBBBA, or the Working Families Tax Cuts Act) made the credit permanent and enhanced some of its features.

Credit Overview

The credit is designed to help employers financially assist employees who take family or medical leave. About 70% of small employers have some type of leave benefit but not necessarily with any pay. According to one source, about 12% to 18% of companies with fewer than 50 employees offer this benefit, but changes in the law may see this statistic increase.

Employees that entitle the employer to the credit. OBBBA expanded the ability of employers to claim the credit for employees with six months of service and for part-time employees customarily working 20 hours or more per week. Before the law change, there was a one-year period.

Credit amount. This non-refundable credit ranges from 12.5% to 25% of wages paid to an employee for up to 12 weeks of annual leave. The applicable percentage is based on the wage replacement. As a minimum, the payments must be at least 50% of an employee’s wages.

Payments versus premiums. OBBBA allows the credit to be claimed whether an employer makes payments directly to employees or pays premiums on a policy that provides this benefit. The IRS has provided guidance to employers offering this benefit in 2026 and beyond. Some key points:

● If any portion of the premium provides funding for leave that would not be eligible for credit under the wage method, that portion of the premium is not eligible for credit under the premium method. An allocation of the blended premium is required.

● An employer can claim the credit using the wage method for certain leave and the premium method for other leave, but not both for the same leave.

Other Rules

● Written plan. In order to claim the credit, the employer must have a written plan.

● Reasons for leave. There are 6 specified reasons for covered leave:

1.) Employee’s own serious health condition

2.) Birth of child (both mother and father are eligible for bonding leave)

3.) Adoption or foster care

4.) Care of an immediate family member (spouse, child, parent) who has a serious health condition

5.) Military exigency to permit an employee with a spouse, child, or parent on active duty to deal with various matters (making childcare arrangements, handling legal affairs)

6.) Care by an employee of a spouse, child, parent, or next of kin who is a servicemember or veteran with a serious injury or illness

● Period of coverage. The plan must provide at least 2 weeks of benefits. These benefits may run for up to 12 weeks (26 weeks for an employee who is caring for a spouse, child, parent, or next of kin of a servicemember or veteran with a serious illness or injury).

● Deduction for premiums. No deduction is allowed for the portion of premiums paid for which the paid family and medical leave credit is claimed. In other words, no double dipping.

● Employment taxes. Be sure to treat benefits paid by the company to employees correctly for purposes of income tax withholding, FICA and FUTA taxes, and W-2 reporting. The benefits may or may not be taxable to employees, depending on certain things.

Conclusion

The recent guidance is only the first step in IRS information for employers claiming the credit or thinking about offering paid family and medical leave. The IRS has promised proposed regulations (will they be issued by the end of this year?). Until then, employers can rely on the guidance in Notice 2026-28.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She is the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Smooth Failing, and Home Business Magazine’s Home-Based Business Guide. Follow Barbara on Twitter @BigIdeas4SB.