S-Corp Paid Family Leave Credit: New 2026 IRS Rules
If your S-corp pays employees while they’re out on family or medical leave, you may be sitting on a federal credit you’re not claiming. The One Big Beautiful Bill Act (OBBBA) made the Section 45S paid family leave credit permanent starting with the 2026 tax year and added a second way to calculate it. The credit runs 12.5% to 25% of qualifying wages or insurance premiums, and for 2026 it’s worth a second look even if you skipped it before.
What OBBBA changed about the paid family leave credit
Section 45S has existed since the 2017 Tax Cuts and Jobs Act, but it was always temporary and set to expire. OBBBA struck the expiration date entirely, making the credit permanent for taxable years beginning after December 31, 2025. That’s this tax year for a calendar-year S-corp. OBBBA also gave employers a second way to qualify: alongside the original wage method, employers can now elect a premium method, claiming the credit based on premiums paid for a paid family and medical leave insurance policy instead of wages paid during actual leave. On August 5, 2026, the IRS issued Notice 2026-28, the first real guidance on how the premium method works in practice.
How the wage method credit is calculated
Under the wage method, the credit equals an “applicable percentage” of wages paid to qualifying employees while they’re on family or medical leave. That percentage starts at 12.5% when you replace 50% of an employee’s normal wages, and climbs 0.25 percentage points for every point above 50%, topping out at 25% once you replace 100% of wages. The wages you can count are capped at the employee’s normal hourly rate times the hours of leave taken, and no more than 12 weeks of leave per employee counts toward the credit in a given year. Pay 100% of wages during a 12-week leave, and you’re looking at a 25% credit on every dollar paid.
The new premium method, and its limits
If your S-corp carries a PFML insurance policy instead of self-funding leave, you can now claim the credit on the premiums instead of on wages actually paid, and the rate is calculated the same way, based on the policy’s rate of payment, regardless of whether any employee actually took leave that year. Notice 2026-28 draws a hard line here: a premium only counts if it funds coverage that would have been creditable under the wage method. Premium dollars covering leave required by state or local law, leave paid by a state or local government, or leave for someone who isn’t a qualifying employee at the time don’t count. If a single policy blends creditable and non-creditable coverage, you have to allocate the premium using a reasonable, documented method. And you can’t double-dip — if a premium already generated a credit, you can’t also claim the wage credit for benefits that premium later pays out.
Which employees actually qualify
The credit only applies to employees who meet three tests. They must be customarily employed at least 20 hours a week, and OBBBA now lets you shorten the tenure requirement from one year down to six months if you choose to elect it. The bigger constraint for a small S-corp is the compensation cap: a qualifying employee’s prior-year compensation can’t exceed 60% of the Section 414(q)(1)(B) highly compensated employee threshold for that prior year — for leave taken in 2026, that’s $96,000, based on the $160,000 threshold in effect for 2025. If you’re the only shareholder-employee on payroll and your own reasonable compensation runs above that figure, as it often should given how reasonable comp gets set, the credit won’t apply to your own leave. It’s built for rank-and-file staff, not owner-employees drawing a market salary.
To claim anything at all, you also need a written policy in place before the leave happens. The policy has to guarantee at least two weeks of paid leave a year for full-time qualifying employees (prorated for part-time), and it has to pay out at least 50% of the employee’s normal wages. A policy adopted after the fact, or one that pays less than half of normal wages, doesn’t qualify you for any percentage of the credit. OBBBA also changed how controlled groups aggregate for this test, shifting from the old Section 52 rules to the Section 414(b)/(c) common-control rules, with a narrow exception for employers who can show a substantial, legitimate business reason for not offering the same policy across related entities.
What this means for your S-corp
This credit rewards S-corps that already offer real paid leave, or that are willing to formalize a policy now that the rule is permanent instead of a one-year gamble. It sits alongside the employer childcare credit as another OBBBA-era employer credit worth checking against your actual payroll before year-end, not after. The premium method is genuinely useful if you’re already shopping PFML insurance for a state mandate, since Colorado and a growing list of other states now require it, but Notice 2026-28 makes clear the state-mandated portion itself never generates a federal credit. Run the numbers both ways, wage method against premium method, before you file, and don’t assume the credit covers your own paycheck if you’re the higher earner in the business.
Where this gets genuinely complicated is the compensation cap interacting with multi-entity ownership, the allocation of blended insurance premiums, and how state-mandated leave programs interact with the federal credit differently state by state. Notice 2026-28 is only interim guidance, with proposed regulations still coming and a comment period open through October 16, 2026, so some of these mechanics could shift before you file. If you want to know whether your S-corp’s leave policy actually qualifies and which method nets you more, talk to us.