New rules could create valuable tax-saving opportunities for small-business owners—even when no employees take leave.
If you own a small business, providing paid family and medical leave may offer more than an opportunity to support your employees. It could also help reduce your federal tax bill.
The Paid Family and Medical Leave Tax Credit is now a permanent part of the tax code, and important changes for 2026 have expanded who may qualify.
Even if you’ve considered this credit before and decided it wasn’t right for your business, it’s worth another look.
What Is the Paid Family Leave Tax Credit?
The federal Paid Family and Medical Leave Tax Credit, also known as Section 45S, rewards eligible employers that provide qualifying paid leave to employees.
Depending on how much of an employee’s normal wages your leave policy replaces, your business may qualify for a credit ranging from 12.5% to 25% of eligible leave wages.
For example, a qualifying policy that pays employees 100% of their regular wages during approved family or medical leave may earn the maximum 25% credit.
But the biggest news for 2026 isn’t simply the credit itself. It’s how the new rules could make it available to more businesses.
Three Important Changes for 2026
1. Your Business May Qualify Even When Nobody Takes Leave
Previously, the credit was generally based on wages paid while an employee was taking qualifying family or medical leave.
Beginning in 2026, eligible employers have another option.
Businesses may calculate the credit using qualifying paid family and medical leave insurance premiums instead of actual leave wages.
That means your business could potentially earn a tax credit even in a year when no employees take leave.
2. State-Mandated Leave May Help Your Business Qualify
If your business operates in a state with paid family leave requirements, there’s another important change.
Beginning in 2026, certain leave provided under state or local requirements can count toward satisfying the federal credit’s eligibility requirements.
However, the credit itself is still calculated only on qualifying employer-funded amounts—not leave benefits paid by the government or required under state or local law.
For businesses that previously fell short of federal eligibility requirements, this change could make a meaningful difference.
3. Business Owners May Qualify for Their Own Paid Leave
Here’s something many business owners may overlook: Depending on how your company is structured, your own paid family or medical leave could potentially generate a tax credit.
For example, certain owners of S corporations or C corporations who receive qualifying W-2 wages may be eligible, provided they meet the applicable compensation and other requirements.
Sole proprietors and partners generally cannot claim the credit based on their own self-employment earnings because those earnings are not qualifying FUTA wages.
The important takeaway? Your business structure matters, and so does how you’re compensated.
What Should Business Owners Do Now?
Before assuming your business does—or doesn’t—qualify, consider a few important questions:
- Do you have a written paid family and medical leave policy?
- Does your business provide qualifying leave or carry eligible leave insurance?
- Could your existing state-mandated leave help satisfy the requirements?
- Are you paying yourself a W-2 salary through a corporation?
- Are you properly documenting qualifying leave and payroll?
Your written policy, payroll records, compensation, and business structure all play an important role in determining eligibility.
Don’t Overlook a Potential Tax-Saving Opportunity
The 2026 changes make the Paid Family and Medical Leave Tax Credit worth revisiting, particularly for small-business owners who may have dismissed it in previous years.
And because the credit is now permanent, understanding how it applies to your business could provide opportunities beyond this year’s tax return.
Before you leave a potential tax credit on the table, let’s take a closer look.
IRS Help can review your business structure, compensation, and existing leave policies to help determine whether you qualify and how these changes may affect your tax planning.
This article provides general tax information. Eligibility and available credits depend on individual circumstances and applicable IRS requirements.