IRS Notice 2026-28: The Treasury Department and the IRS issued IRS Notice 2026-28 paid family medical leave credit guidance on August 5, 2026, giving employers their first detailed roadmap for claiming a significantly expanded and, for the first time, permanent tax credit for offering paid family and medical leave. The notice implements changes made under Section 70304 of the One Big Beautiful Bill Act, officially known as the Working Families Tax Cuts, which turned the previously temporary Section 45S credit into a permanent part of the tax code and introduced a completely new way for businesses to calculate it.
Treasury Secretary Scott Bessent framed the guidance as removing a longstanding obstacle for employers, saying hardworking Americans should not have to choose between caring for a loved one and earning a paycheck. For the 2026 tax year, the first full year these changes apply, eligible employers can now claim a credit worth between 12.5% and 25% of wages paid to qualifying employees during up to 12 weeks of family and medical leave, with a brand-new premium-based calculation option that could make the credit dramatically simpler to claim than the traditional wage-based method. This article breaks down exactly what Notice 2026-28 covers, how the new premium method works, who now qualifies as an eligible employee, and what employers need to do differently starting this tax year. We’ll be updating this article monthly as the IRS finalizes proposed regulations building on this notice.
Key Facts About the Permanent Section 45S Credit
| Detail | Information |
|---|---|
| Notice issued | August 5, 2026 (Notice 2026-28) |
| Legal basis | Section 70304, One Big Beautiful Bill Act (Working Families Tax Cuts) |
| Status of the credit | Now permanent, previously temporary under the 2017 Tax Cuts and Jobs Act |
| Credit range | 12.5% to 25% of qualifying wages |
| Maximum leave period covered | Up to 12 weeks per taxable year |
| Minimum weekly hours for a qualifying employee | 20 hours per week |
| Minimum tenure option | As short as 6 months, down from 1 year |
| New calculation option | Premium method, based on insurance premiums rather than actual wages paid during leave |
| Public comment deadline | October 16, 2026 |
| First full effective tax year | 2026 (taxable years beginning after December 31, 2025) |
| Claim form | IRS Form 8994 |
What IRS Notice 2026-28 Actually Covers
Notice 2026-28 provides guidance on the employer credit for paid family and medical leave under Section 45S of the Internal Revenue Code, as amended by the One Big Beautiful Bill Act. The notice modifies the IRS’s original 2018 guidance on this credit, Notice 2018-71, to reflect the statutory changes Congress made in 2025. According to the notice itself, Treasury and the IRS intend to publish forthcoming proposed regulations under Section 45S that will incorporate the guidance contained in this notice, meaning Notice 2026-28 represents interim, reliable guidance that employers can use now while more comprehensive formal regulations are still being developed.
Section 45S Made Permanent: Why This Change Matters
Before this year, Section 45S had been a temporary incentive first enacted under the 2017 Tax Cuts and Jobs Act, and it was scheduled to expire for wages paid after 2025. Because of that expiration risk, many employers historically hesitated to build the credit into long-term compensation planning, and the credit was widely considered underutilized relative to its potential reach. The One Big Beautiful Bill Act eliminated that uncertainty entirely by making Section 45S a permanent fixture of the tax code, while simultaneously loosening several of the eligibility requirements that had made the credit difficult for many employers to actually claim in practice.
The New Premium Method Explained
The most significant technical change introduced by Notice 2026-28 is guidance on an entirely new way to calculate the credit, known as the premium method, established under the newly enacted Section 45S(a)(1)(B). Under the traditional approach, now referred to as the wage method, employers calculate their credit based on actual wages paid to specific employees while those employees were physically on family or medical leave, which requires detailed tracking of individual leave instances throughout the year.
The premium method works differently. Employers electing this method calculate their credit based on the premiums they paid or incurred for an insurance policy that provides family and medical leave coverage, rather than tracking actual wage payments during leave events. Critically, the statute is explicit that the rate of payment under the premium method is determined without regard to whether any qualifying employees actually took family or medical leave during the taxable year at all. This means an employer maintaining a compliant paid leave insurance policy can potentially calculate and claim the credit even in a year when no employees ended up using the benefit, a meaningful administrative simplification compared to the wage method’s leave-by-leave tracking requirements.
Premium Method vs. Wage Method: Which Should Employers Choose
Notice 2026-28 specifically addresses how the two methods compare, how employers should allocate qualifying premiums, and the process for electing between the premium method and the wage method. While baseline eligibility requirements remain anchored to the same underlying standards regardless of which method is chosen, the practical administrative burden differs considerably. The wage method requires employers to track which specific employees took leave, calculate their regular wage rates, and coordinate that data with payroll and FUTA wage reporting throughout the year. The premium method shifts the calculation to a more predictable, policy-level figure based on insurance costs, which may appeal particularly to employers who purchase third-party paid leave insurance policies rather than self-administering benefits directly.
Who Counts as a Qualifying Employee Now
Notice 2026-28 clarifies an important update to employee eligibility under the amended statute. A qualifying employee is now defined as someone customarily employed for at least 20 hours per week, extending credit eligibility to part-time employees in a way the original credit did not clearly support. Employers also now have the option to include employees who have worked for as little as six months, a significant reduction from the prior standard, which generally required a full year of employment before an employee’s paid leave could qualify for the credit. This shorter tenure threshold means employers with meaningful staff turnover, including many small and mid-sized businesses, can now potentially claim the credit for a larger share of their workforce than under the previous rules.
Updated Aggregation Rules for Related Businesses
For employers structured across multiple related entities, Notice 2026-28 clarifies that all persons treated as a single employer under Internal Revenue Code sections 414(b) and 414(c), the standard controlled-group aggregation rules, are treated as one employer for purposes of the credit. The notice does include exceptions to this aggregation requirement where a business can demonstrate a substantial and legitimate business reason for structuring its paid leave policies separately across related entities, though the IRS has specifically asked for public comment on what qualifies as a substantial and legitimate business reason, indicating this standard may be refined further in the forthcoming proposed regulations.
State-Mandated Leave and the Credit: What Counts, and What Doesn’t
One of the more practically important clarifications in Notice 2026-28 addresses the growing number of states with their own mandatory paid family and medical leave programs. According to the notice, leave that is required by state or local law, or that is paid directly by a state or local government program, counts toward determining whether an employer’s leave policy meets the eligibility requirements for the credit, but that same state or local government-funded leave does not count toward the actual credit amount an employer can claim. In practical terms, this means employers operating in states with their own paid leave mandates need to carefully separate what portion of their paid leave benefit is funded by the state program versus funded directly by the employer, since only the employer-funded portion can generate a federal credit under Section 45S.
No Double-Dipping: The Deduction Offset Rule
Notice 2026-28 also reinforces an existing anti-double-benefit rule: employers cannot deduct the portion of wages or insurance premiums that equals the amount of credit they claim under Section 45S. This prevents businesses from both claiming the tax credit and separately deducting that same dollar amount as a business expense, a standard structural feature designed to ensure the credit functions as intended rather than compounding with an ordinary business deduction for the identical cost.
How Much the Section 45S Credit Is Actually Worth
Under the amended statute, eligible employers can claim a general business tax credit ranging from 12.5% to 25% of wages paid to qualifying employees, for up to 12 weeks of family and medical leave per taxable year. The exact percentage within that range depends on the wage replacement rate specified in the employer’s written leave policy, with more generous wage replacement rates generally producing a higher credit percentage, consistent with how the credit has always been structured to reward more generous paid leave benefits.
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Written Policy Requirements Employers Still Need to Meet
To qualify for the credit under either calculation method, employers generally need a written policy providing that any full-time qualifying employee is entitled to at least two weeks of annual paid family and medical leave, with a prorated amount required for qualifying part-time employees. The paid leave itself must provide payment of not less than 50% of an employee’s normally paid wages. The policy must also include protective, anti-retaliation language confirming the employer will not interfere with, restrain, or deny an employee’s exercise of rights under the policy, and will not discharge or otherwise discriminate against an employee for opposing a practice the policy prohibits.
Public Comment Period: What the IRS Is Still Asking About
Notice 2026-28 is explicitly framed as interim guidance ahead of more comprehensive forthcoming proposed regulations, and Treasury and the IRS are actively requesting public comments on several unresolved implementation questions. Specifically, the agencies are seeking input on methods for allocating blended insurance premiums when a single policy covers multiple types of benefits, how the credit should apply to voluntary state programs administered by private insurers rather than directly by a state government, and what should qualify as a substantial and legitimate business reason for not maintaining a uniform written policy across a controlled group of related employers. Comments on the notice are due by October 16, 2026, and can be submitted either electronically or by mail, with complete submission instructions included in the notice itself.
How Employers Can Claim the Section 45S Credit
Eligible employers claim the paid family and medical leave credit using IRS Form 8994, Employer Credit for Paid Family and Medical Leave, filed alongside the general business credit calculations on their federal tax return. Employers can rely on the guidance in Notice 2026-28 for taxable years beginning after December 31, 2025, meaning the 2026 tax year is the first full year in which the permanent, expanded version of the credit, including the new premium method option, is fully in effect.
Premium Method vs. Wage Method at a Glance
| Feature | Wage Method | Premium Method |
|---|---|---|
| Basis for calculation | Actual wages paid during employee leave events | Premiums paid or incurred for a qualifying insurance policy |
| Requires tracking individual leave instances | Yes | No |
| Credit available even if no employee takes leave that year | No | Yes, based on statute |
| Best suited for | Employers self-administering paid leave benefits directly | Employers using third-party paid leave insurance policies |
Official Resources and Where to Get Guidance
| Resource | Purpose | Link |
|---|---|---|
| IRS Notice 2026-28 (full text) | Complete official guidance document | irs.gov/pub/irs-drop/n-26-28.pdf |
| Section 45S official FAQs | IRS frequently asked questions on the credit | irs.gov/newsroom/section-45s-employer-credit-for-paid-family-and-medical-leave-faqs |
| IRS Form 8994 | Official form to claim the credit | irs.gov/forms-pubs/about-form-8994 |
| IRS newsroom announcement | Official press release on Notice 2026-28 | irs.gov/newsroom |
| Submit public comments | Comment on the forthcoming proposed regulations | regulations.gov |
FAQs
What does IRS Notice 2026-28 actually do?
It provides guidance on claiming the Section 45S employer credit for paid family and medical leave, as amended by the One Big Beautiful Bill Act, including detailed rules for a brand-new premium-based method of calculating the credit.
Is the paid family and medical leave credit now permanent?
Yes. The One Big Beautiful Bill Act made Section 45S a permanent part of the tax code, removing the expiration date that had applied under the original 2017 Tax Cuts and Jobs Act version of the credit.
What is the new premium method under Notice 2026-28?
It is an alternative way to calculate the Section 45S credit based on premiums paid for a qualifying paid family and medical leave insurance policy, rather than tracking actual wages paid to employees during specific leave events, and it can apply even if no employees take leave during the year.
How much is the paid family and medical leave credit worth?
Eligible employers can claim a credit worth 12.5% to 25% of qualifying wages, for up to 12 weeks of family and medical leave per employee per taxable year, depending on the wage replacement rate in the employer’s written policy.
Who qualifies as an eligible employee under the updated rules?
Employees customarily working at least 20 hours per week, with employers now having the option to include employees with as little as six months of tenure, down from the previous one-year requirement.
Does state-mandated paid leave count toward this federal credit?
Leave required by state or local law counts toward determining whether an employer’s policy meets eligibility requirements, but state or local government-funded leave does not count toward the actual credit amount, which is limited to employer-funded leave.
When can employers start using this guidance?
Employers can rely on Notice 2026-28 for taxable years beginning after December 31, 2025, making 2026 the first full tax year the permanent, expanded credit and the new premium method apply.
Can the public still weigh in on how this credit is implemented?
Yes. Treasury and the IRS are accepting public comments on several open implementation questions, including premium allocation methods and aggregation rule exceptions, through October 16, 2026.
Conclusion
IRS Notice 2026-28 marks a significant step in implementing one of the more employer-friendly provisions of the One Big Beautiful Bill Act, transforming the Section 45S paid family and medical leave credit from a temporary, underused incentive into a permanent, more accessible business tax credit with a genuinely new calculation option in the premium method. With eligibility now extending to more part-time and shorter-tenure employees, and a public comment period still open through October 16, 2026, employers evaluating whether to adopt or expand a paid leave policy this year have real financial incentive to review this guidance closely, ideally with a tax professional, before finalizing their 2026 written leave policy and credit election.
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