Section 45S Paid Family and Medical Leave Credit: What Changed for 2026
A tax credit that almost no employer used is about to become considerably more usable. The Section 45S employer credit for paid family and medical leave was enacted as a temporary provision in 2017 and was so difficult to qualify for that most businesses never attempted it. The One Big Beautiful Bill Act made it permanent and loosened the eligibility rules, effective for tax years beginning in 2026. Pathfinding Consultants provides business tax preparation Los Angeles employers rely on to determine whether the credit now reaches their payroll.
IRS DISCLAIMER: This article is for general informational purposes only and is not tax, legal, or accounting advice. Credit eligibility depends on your written policy terms, employee census, wage levels, and current IRS guidance. Always consult a qualified tax professional, Enrolled Agent, CPA, or employment attorney before relying on this guide for a specific decision. Pathfinding Consultants encourages every Los Angeles business owner to seek personalized guidance for their own business. |
What the Credit Is
Section 45S allows a general business credit to eligible employers that provide paid family and medical leave to qualifying employees. It is claimed based on wages paid to qualifying employees while they are on family and medical leave, subject to specific conditions (source: IRS, Section 45S Employer Credit for Paid Family and Medical Leave FAQs).
The paid family and medical leave credit had been a temporary provision under the Tax Cuts and Jobs Act. OBBBA modified the eligibility requirements and made the credit permanent, with the changes first effective for tax years beginning in 2026 (source: One Big Beautiful Bill Act; IRC Section 45S). For a Los Angeles employer that already provides paid leave beyond what state law mandates, this is a credit against wages the business is already paying.
The Written Policy Requirement
Eligibility begins with a written policy, and the written policy requirement is specific. The policy must provide that any full-time qualifying employee is entitled to at least two weeks of annual paid family and medical leave, with qualifying part-time employees entitled to a prorated amount. Paid leave means payment of not less than 50% of the wages normally paid to the employee (source: IRC Section 45S; IRS Section 45S FAQs).
The written policy requirement also includes mandatory protective language: the employer will not interfere with, restrain, or deny the exercise of or the attempt to exercise any right provided under the policy, and will not discharge or in any other manner discriminate against any individual for opposing any practice prohibited by the policy. Part-time employees for this purpose include those customarily employed for not less than 20 hours per week. A policy missing any of these elements does not support the credit regardless of how generous the leave actually provided is.
Who Is a Qualifying Employee
A qualifying employee must have been an employee for at least one year, though the employer may elect a shorter period of not less than six months. There is also a compensation ceiling: a qualifying employee cannot have annualized compensation in the prior year in excess of 60% of the amount applicable under Section 414(q)(1)(B). For 2026, that means eligible employees could not have had wages in 2025 in excess of $96,000 (source: IRC Sections 45S and 414(q)(1)(B)).
The compensation ceiling is the provision that shapes which payroll the credit actually reaches. Paid leave provided to employees above that threshold, including all highly compensated employees, is not eligible. For a Los Angeles employer, this means the credit is oriented toward the middle of the wage scale rather than toward senior staff — a business modeling the credit needs its employee census by prior-year wage level, not just a headcount.
Already paying employees during family or medical leave?
Pathfinding Consultants — Business Tax Preparation, Los Angeles & Southern California
(949) 620-1036 | pathfindingconsultants.com
How the Credit Is Calculated
The credit is a percentage of the wages paid to a qualifying employee while on family and medical leave, for up to 12 weeks per taxable year. The minimum percentage is 12.5%, increased by 0.25 percentage points for each percentage point by which the amount paid to a qualifying employee exceeds 50% of that employee's wages, up to a maximum of 25% (source: IRS, Section 45S Employer Credit for Paid Family and Medical Leave FAQs).
The paid family and medical leave credit therefore rewards replacement rate directly. An employer paying exactly 50% of normal wages during leave earns the 12.5% minimum. An employer paying 100% of normal wages reaches the 25% maximum. Because the calculation runs off the replacement percentage rather than the dollar amount, a modest increase in the paid leave rate can move the credit percentage meaningfully. In certain cases an additional limit may apply.
The California Wrinkle
For a Los Angeles employer, the interaction with state law is the most important detail in the entire provision. Paid family and medical leave required by state or local law is counted toward determining whether the employer's overall paid leave program qualifies for the Section 45S credit. However, leave required by state or local law is not counted toward the amount of the credit.
That split matters in California, where state programs already provide wage replacement. State-mandated leave can help an employer clear the qualification threshold, but the credit is computed only on the employer's own voluntary paid leave. A Los Angeles business that provides nothing beyond what California already requires will generally find the credit computes to little or nothing, while an employer topping up state benefits with its own paid leave has a genuine credit base.
Which Leave Actually Qualifies
Qualifying paid leave under Section 45S covers specific purposes: the birth of an employee's child and care for that child; placement of a child with the employee for adoption or foster care; care for the employee's spouse, child, or parent with a serious health condition; a serious health condition making the employee unable to perform their job; a qualifying exigency arising from a spouse, child, or parent on covered active duty in the Armed Forces; and care for a service member.
Paid vacation leave, personal leave, and general medical or sick leave that is not specifically for one of those purposes is not family and medical leave for this credit. A generic paid-time-off bank that employees may use for any reason will not support the credit — the policy must designate leave for the qualifying purposes specifically. Business consulting near me searches from Los Angeles employers spike when a PTO policy turns out not to qualify despite the business paying substantial leave wages.
Why the Policy Drafting Is the Whole Credit
Pathfinding Consultants is an Enrolled Agent firm providing business tax preparation Los Angeles employers have relied on to review a written policy against the Section 45S requirements before the tax year begins, since a policy adopted mid-year does not retroactively qualify leave already taken.
Employers reviewing this alongside other payroll credits should also see our guide to the retirement plan startup tax credit, and our bookkeeping services overview covers the payroll detail the credit calculation requires. A business consulting near me conversation before January is when policy language can still be adjusted, and business tax preparation Los Angeles clients who handle it that way capture a credit on wages they were already paying.
Common Mistakes with the Section 45s Credit
Relying on a general PTO policy, when leave must be specifically designated for the qualifying family and medical leave purposes
Omitting the required protective non-interference and non-discrimination language from the written policy
Computing the credit on state-mandated leave, which counts toward qualification but not toward the credit amount
Including employees whose prior-year wages exceeded the compensation ceiling, which for 2026 means 2025 wages above $96,000
Paying exactly 50% of normal wages and assuming the maximum credit applies, when 50% earns only the 12.5% minimum rate
Every one of these mistakes is avoidable when the written policy requirement is reviewed against the statute before the plan year starts, and the employee census is screened by prior-year compensation before the credit is modeled. A business consulting near me search in the fourth quarter is when the paid family and medical leave credit can still be built into next year's policy rather than missed entirely.
Get your leave policy reviewed against the 2026 Section 45S rules.
Pathfinding Consultants — Business Tax Preparation, Los Angeles & Southern California
(949) 620-1036 | pathfindingconsultants.com
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