IRS Issues Guidance on Expanded Employer Credit for Paid Family and Medical Leave

IRS Notice 2026-28 provides initial guidance on the now-permanent Internal Revenue Code Section 45S employer credit for paid family and medical leave. Beginning with 2026 taxable years, eligible employers may calculate the credit using either qualifying wages paid during leave or premiums paid for qualifying paid-family-and-medical-leave insurance. Employers may use both methods for different leave benefits within the same taxable year, but cannot claim both credits for the same funded benefit. Taxpayers may rely on the notice for taxable years beginning after December 31, 2025 and before issuance of forthcoming proposed regulations. Comments are requested by October 16, 2026.

Eligibility has been expanded to employees with at least six months of service who customarily work at least 20 hours per week. This represents a broadening of the prior eligibility rules and will bring more part-time and shorter-tenure employees within the scope of qualifying leave arrangements.

State- or locally mandated leave may help an employer satisfy eligibility requirements but cannot itself generate the federal credit. This distinction is important for employers operating in states with mandatory paid leave laws — the state mandate may satisfy the "written policy" requirement, but the credit calculation must be based on amounts paid above and beyond what the state requires, or on separately funded voluntary benefits.

The notice introduces two methods for calculating the credit:

Wage method: The credit is calculated based on qualifying wages paid to employees during covered leave periods. This method is straightforward for employers who self-fund their paid leave programs.

Premium method: The credit is calculated based on premiums paid for qualifying paid-family-and-medical-leave insurance. This method is relevant for employers who have purchased insurance to fund their leave obligations.

Blended insurance premiums — policies that cover both creditable and non-creditable leave — must be divided between the two categories using a reasonable, objective, and consistently applied method supported by contemporaneous records. Employers should establish and document their allocation methodology before the end of the taxable year.

Turkish companies that have established U.S. subsidiaries, joint ventures, or significant U.S. employee populations should review their paid leave arrangements in light of this guidance. Key action items include:

Policy review: Ensure that written paid leave policies satisfy the Section 45S requirements, including the minimum leave duration and wage replacement percentage thresholds.

Eligibility mapping: Identify which employees meet the six-month service and 20-hours-per-week thresholds, and determine whether any state-mandated leave benefits affect the federal credit calculation.

Method selection: Evaluate whether the wage method or premium method — or a combination for different benefit types — produces the optimal credit outcome for the company's specific leave structure.

Controlled group analysis: Companies that are part of a controlled group for U.S. tax purposes must aggregate employee counts and leave policies across the group when determining eligibility.

Multi-state operations: Companies operating in multiple U.S. states should separately track mandated benefits by state, as those amounts affect eligibility differently from the credit calculation.

The credit can represent a meaningful tax benefit for employers with substantial paid leave programs, and the expanded eligibility rules increase the number of qualifying employees. Coordination between tax, payroll, human resources, and insurance functions is essential to capture the full benefit.

ULF New York Consulting Inc. advises Turkish companies on U.S. tax compliance, employment law, and market entry. This analysis is provided for informational purposes only and does not constitute legal advice.