Section 45S Paid Family and Medical Leave Credit—What’s Changed and Why It Matters

By Adam Aucoin June 16, 2026

Some tax provisions stay in the background for years before suddenly becoming relevant again. Section 45S—the credit for employer-provided paid family and medical leave—is a good example.

Originally enacted as part of 2017’s Tax Cuts and Jobs Act, the credit was easy to overlook. Between strict eligibility requirements and uncertainty about whether it would continue, many institutions chose not to build it into their planning. That may now be changing.

The One Big Beautiful Bill Act, enacted in July 2025, makes the Section 45S credit permanent and includes several changes that may make it more practical for banks, financial institutions, and other businesses to evaluate going forward.

What is the credit?

Section 45S provides a federal tax credit to employers that offer paid family and medical leave to qualifying employees. The credit was generally based on wages paid during qualifying leave (up to 12 weeks per employee per year) and contained some strict eligibility criteria.

What changed?

Perhaps the most important change is that the credit is now permanent, rather than expiring this year as previously scheduled. That alone allows institutions to evaluate it as part of longer-term planning rather than as a temporary opportunity that may disappear before implementation.

Employers also now have flexibility to calculate the credit based either on wages paid or on premiums paid for certain eligible insurance programs.

The interaction with state paid leave programs has also improved, which may allow credits to be claimed on employer-paid benefits that exceed state-mandated amounts.

Eligibility overview

To qualify, an employer generally must maintain a written paid family and medical leave policy that provides at least two weeks of annual paid leave to full-time qualifying employees, with a prorated amount for part-time employees, and that pays at least 50% of normal wages during the leave period. Beginning in 2026, the policy also generally should include protective language stating that the employer will not interfere with an employee’s rights under the policy or retaliate against an employee for using the benefit.

Only costs related to certain employees are eligible. In general, the employee must have been employed for at least one year, although employers may elect to use a six-month service requirement instead. In addition, the rules generally focus on employees who customarily work at least 20 hours per week. Finally, only employees who in the prior year were paid less than the annual compensation threshold qualify. That threshold is generally described as 60% of the highly compensated employee limit, which for 2026 yields a cap of $96,000 ($160,000 x 60%).

The leave itself must be for a qualifying family and medical leave purpose, such as the birth or adoption of a child; an employee’s own serious health condition; care for a spouse, child, or parent with a serious health condition; certain military-related exigencies; or care for a covered service member. The credit is limited to up to 12 weeks of qualifying leave per employee per year.

One other important point is that state or local paid leave mandates (such as those in Maine, Connecticut, or Massachusetts) no longer necessarily prevent an employer from qualifying for the credit. However, amounts required by state or local law generally do not generate the federal credit on their own. Instead, the credit generally applies to the portion of the employer-paid benefit that exceeds those required amounts.

How the credit is calculated

The credit is not a flat percentage. Under the traditional wages-paid method, the credit equals 12.5% of qualifying leave wages if the employer pays 50% of the employee’s normal wages during leave. The rate then increases by 0.25 percentage points for each percentage point by which the wage replacement rate exceeds 50%, up to a maximum credit rate of 25% when leave is paid at 100% of normal wages. Starting in 2026, employers may also elect an alternative premium-based method under which the credit is calculated on eligible insurance premiums paid for a qualifying paid family and medical leave policy rather than on wages actually paid during leave.

Illustrative Example

Facts:

• A bank provides 8 weeks of qualifying paid family and medical leave at 100% wage replacement to 10 qualifying employees.
• Each employee earns approximately $78,000 annually.
  • For 10 employees taking 8 weeks of leave, qualifying wages equal $78,000 ÷ 52 × 8 × 10 = $120,000.
• Premiums paid to cover 100% of wages equal 5% of wages.

Solution:

Because the leave is paid at 100% of normal wages, the credit percentage reaches the maximum rate of 25%. Applying that rate to $120,000 of qualifying wages produces a credit of $30,000 under the wage method. If the premium method were used (and assuming future guidance doesn’t change this approach), the calculation could look like this:

$78,000 x 10 employees x 5% premium x 25% credit = $9,750

If instead only 50% of wages were replaced, the results would be as follows:

Wage Method: $78,000/52 weeks x 50% x 10 employees x 8 weeks x 12.5% = $7,500

Premium Method: $78,000 x 10 employees x 5% premium x 12.5% credit = $4,875

How to obtain the credit

An employer obtains the credit by completing IRS Form 8994 and filing it as an attachment to its annual income tax return. Note that in exchange for the credit (and to avoid double-dipping), the deduction for wages reported on that income tax return (or insurance costs, if the credit is computed based on premiums) must be reduced by the amount of the credit.

Miscellaneous considerations

• State coordination – credits generally apply only to employer-paid amounts above state mandates.
• Documentation – a compliant written policy is required.
• Employee eligibility – compensation limits reduce the benefit for higher earners.
• ASC 740 – consider the impact of this benefit on tax provisions.

Final thoughts

This credit may matter more now because employers that previously ignored it may have a more realistic path to claiming it under the revised rules. The option to use either a wages-paid method or a premium-based method, the ability to coordinate with state-mandated leave programs, and the more flexible service requirement all make the provision more workable in practice, especially for employers operating in states with paid leave mandates.

For these reasons, this is an excellent time to revisit this benefit for 2026. Employers that may be eligible should consider reviewing their written leave policies, confirming whether existing benefits satisfy the statutory requirements, evaluating whether the wages-paid or premium-based approach is more favorable, and ensuring that payroll, HR, and tax teams can track the information needed to support the credit. For banks and other financial institutions, the benefit may not be transformative, but it could become a meaningful part of broader tax-efficiency and employee-benefits planning.

For more information and to discuss the specifics of your situation, please contact Adam Aucoin or your BNN tax service provider at 800.244.7444.