Beginning January 1, 2026, a significant change takes effect for employers offering paid family and medical leave. Under House Resolution 1 (Sec. 70304), Congress has amended and made permanent the Paid Leave Tax Credit under 26 USCS § 45S, offering ongoing financial relief to qualifying employers who go above and beyond federal or state leave requirements.

This move offers a long-term incentive for employers committed to supporting employee wellbeing while managing the cost of extended leave policies.

Who Is Eligible?

The Permanent Paid Leave Tax Credit is available to employers in two scenarios:

1. States without mandatory paid family and medical leave laws – employers offering qualifying leave voluntarily.

2. States with mandated leave – employers that exceed what is legally required in terms of duration or wage replacement.

Requirements to Claim the Credit

To qualify, an employer must meet the following criteria:

• Have a written policy providing at least two weeks of paid family and medical leave annually to full-time employees (with a prorated amount for part-time employees).

• Compensate employees on leave at no less than 50% of their normal wage.

Additionally:

• Leave must be for one of the reasons covered under the federal Family and Medical Leave Act (FMLA).

• The employee must have:

o Worked for the employer for at least one year, or optionally six months if the employer elects to expand access.

o Been customarily employed at least 20 hours per week.

o Earned less than a set annual income threshold (adjusted annually by the IRS) for the employer to claim the credit for wages paid in the following year.

Credit Calculation and Limits

The baseline credit is 12.5% of wages paid during qualifying leave. Employers can earn up to 25% if they provide a higher level of wage replacement (more than 50% of the employee’s regular pay).

• The tax credit applies to up to 12 weeks of leave per employee, per year.

• Employers can also claim the credit for insurance premiums paid toward a qualifying paid family and medical leave policy.

Important caveat: Leave paid for or required by a state or local mandate is not eligible for the federal credit. Only voluntary or excess leave qualifies.

How to Claim the Credit

Employers can claim the credit by filing IRS Form 8994 with their business tax return. You also have the option to elect out of the credit for any given taxable year, which may be a strategic decision for companies with overlapping state or local programs.

Strategic Considerations for Employers

Now is the time for HR leaders, CFOs, and business owners to:

• Audit existing paid leave policies and determine if they qualify or can be enhanced to qualify.

• Review state-specific leave mandates and identify opportunities to offer more generous leave for federal credit eligibility.

• Consider implementing or updating a formal written policy that clearly defines leave terms, eligibility, and compensation.

• Partner with your benefits and payroll consultants to ensure compliance and maximize your tax credit potential.

At Envision Benefits Group, we specialize in helping business’ structure compliant, competitive paid leave programs that are financially sustainable and strategically aligned. If you’re unsure whether your business qualifies or how to structure your policies to meet the new criteria, we’re here to guide you.

Need help navigating this change?

Contact Envision Benefits Group today to assess your eligibility and integrate this opportunity into your overall HR and tax strategy.