2026 Paid Family Leave Credit: Does the Owner Qualify?

The One Big Beautiful Bill Act (OBBBA) did to the paid family and medical leave credit exactly what it did to your Section 199A deduction: it killed the sunset date and made the credit a permanent part of the tax code.

It also rewrote enough of the rules that you should look at this credit again for 2026 even if you looked at it once before and walked away.

And on August 5, 2026, the IRS released Notice 2026-28, which explains the most significant of the new rules: the premium method.

Here is the question that can make this new law better for you: Can you, the owner, create a credit on your own paid leave? For two of the four common business entities, the answer is yes. For the other two, it is a flat no—and no amount of planning changes that.

What the Credit Is

Section 45S hands an eligible employer a general business credit for paid family and medical leave. The credit starts at 12.5 percent of the qualifying leave pay and climbs 0.25 percentage points for every percentage point by which your rate of payment during leave exceeds 50 percent. A policy that replaces 100 percent of normal wages hits the 25 percent tax credit ceiling.

Two hard caps apply:

1. You count no more than 12 weeks of leave per employee per year.

2. The wages you count cannot exceed the employee’s normal hourly rate multiplied by the hours of leave actually taken.

What Changed for 2026

Five changes take effect for tax years beginning after December 31, 2025:

1. The credit is permanent. There is no longer an expiration date to plan around.

2. You may now compute the credit on insurance premiums instead of leave wages.

3. A qualifying employee must be customarily employed at least 20 hours per week.

4. You may elect to treat employees as qualifying after six months of service rather than a full year.

5. The aggregation rule now uses the Sections 414(b) and 414(c) controlled group test, with an escape hatch for a person with a substantial and legitimate business reason for not having a written policy.

The State Mandate Trap Is Gone

One more change is easy to misread, and if you operate in a state with a paid leave mandate, it may be the most valuable item on that list.

Under prior law, leave that state or local law required, or that a state or local government paid for, was invisible for both purposes. It earned no credit, and it did not count toward the two weeks your written policy has to provide.

That combination shut out a lot of employers. If your state already mandated the leave, only what you provided above the mandate counted, along with a top-up on its own (rarely reached) two weeks at 50 percent of normal wages.

The OBBBA pulled those two questions apart. State-required and state-paid leave now counts when you measure whether your policy provides enough leave, which is the eligibility question. It still does not count when you compute the credit itself.

In plain terms, the state program can carry you across the eligibility line, and you claim the credit on the leave pay your business itself funds.

Example. Your state requires eight weeks of paid family leave at 60 percent of wages, paid out of a state fund. Your written policy tops that up to 100 percent of normal wages for the same eight weeks. An employee earning $60,000 takes the full eight weeks.

The employee’s normal hourly rate is $28.85, and eight weeks is 320 hours, so normal wages for the leave period come to $9,232. The state fund covers 60 percent of that, or $5,538. Your business writes a check for the remaining $3,694.

Under prior law, you were not an eligible employer at all. The state’s 60 percent was invisible, which left your policy providing 40 percent of normal wages, under the 50 percent floor. Your credit was zero.

For 2026, the state’s 60 percent counts toward eligibility. Your policy provides eight weeks at 100 percent, so you clear both the two-week minimum and the 50 percent rate. You still compute the credit only on the $3,694 you paid and at a 25 percent applicable percentage, so you earn a $924 credit on this employee’s leave.

Two cautions: First, the exclusion turns on what the law requires, not on who writes the check. If your state mandates the leave but makes you pay for it, that mandated portion still earns you nothing. Second, that 25 percent deserves an asterisk. The applicable percentage keys off the rate of payment under your written policy, and the statute does not say in so many words whether that rate is the 100 percent your policy promises or the 40 percent you actually fund.

Our favorable reading follows from the same sentence that makes state leave count toward the leave you provide, but the IRS has not addressed it, and Notice 2026-28 asks for comments on a near relative of the question. Treat it as unsettled, and document your position.

One more change is easy to misread: Leave that state or local law requires, or that a state or local government pays for, now counts when you measure whether your policy provides enough leave. It still does not count when you compute the credit.

The Premium Method Is Real News

Under the wage method, no leave taken means no credit. If your employees stay healthy and nobody has a baby, you get nothing.

The premium method breaks that link. If you carry an insurance policy for paid family and medical leave, you compute the credit on the premiums you paid or incurred during the year, and the law tells you to determine the rate of payment without regard to whether any qualifying employee was on leave at all.

Key point. You can have a credit in a year when zero employees take leave,

Notice 2026-28 draws the boundary. A premium earns a credit only to the extent it buys creditable coverage, meaning coverage that funds a benefit that would have earned a credit under the wage method. A premium is not creditable to the extent it covers

• leave that is not family and medical leave as defined in Section 45S(e);

• leave payable to someone who is not a qualifying employee at the time you pay or incur the premium;

• leave required by state or local law, or paid for by a state or local government; or

• a benefit that would not be wages under Section 45S(g).

If your policy is a blend of creditable and non-creditable coverage, you have to allocate the premium. Any reasonable method works if it is consistent with the policy terms and supported by contemporaneous records.

To be reasonable, the method has to use objective criteria; it also has to be applied consistently for the whole year and across every person treated as a single employer under the aggregation rule.

You can also have both methods in place in the same year. What you cannot do is double-dip (i.e., claim both a premium credit and a wage credit on the same instance of leave). If a leave payment is funded partly by the insurance and partly out of your general assets, you take the premium credit on the insured portion and the wage credit on the rest.

Two Requirements You Cannot Skip

First, the written policy. You are an eligible employer only if you have a written policy in place that covers all of your qualifying employees, gives full-timers at least two weeks of annual paid family and medical leave (prorated for part-timers), and pays at least 50 percent of normal wages during that leave.

If you employ any qualifying employee who is not covered by Title I of the Family and Medical Leave Act (FMLA), the policy also needs the non-interference and non-discrimination language.

Note the words “all of your qualifying employees.You cannot write a policy that covers only the owner.

Second, qualifying employees. A qualifying employee is one who has been employed for a year or more (or six months, if you make the election), is customarily employed at least 20 hours per week, and had prior-year compensation no greater than 60 percent of the Section 414(q)(1)(B)(i) amount. For your 2026 credit, that last test looks at 2025 compensation, and the number is $96,000.

That $96,000 is a wrecking ball for the higher compensated group.

Does the Owner Qualify?

For the owner, everything turns on one definition. For Section 45S purposes, “wages” means Federal Unemployment Tax Act (FUTA) wages under Section 3306(b), figured without the $7,000 FUTA wage cap. No FUTA wages, no credit. Here is how that plays out across the four entities.

Schedule C Proprietorship

No credit. If you operate as a Schedule C proprietor, you are not your own employee. Your Schedule C net profit is self-employment income, not FUTA wages, so your time away from the business cannot produce a credit, no matter how carefully you word your policy.

You can absolutely create the credit for your employees. You cannot create one for yourself.

It gets worse if you have family on the payroll. Wages you pay your spouse, your child under age 21, or your own parent are all excluded from FUTA, which means they are not Section 45S wages and they produce no credit.

The FUTA trouble follows you into a single-member LLC that you treat as a disregarded entity.

Partnership

No credit. A partner is not an employee of the partnership, and guaranteed payments are not FUTA wages, so a partner’s leave produces nothing.

Your non-partner employees can generate the credit, which the partnership computes at the entity level and passes through to the partners on Schedule K-1. And if the only partners are you and your spouse, the family exclusion above reaches your under-21-year-old child on the payroll, because every partner (the two spouses) is that child’s parent.

S Corporation

Yes, up to $96,000. Your salary is W-2 wages subject to FUTA, so you are an employee for this purpose. Meet the service test and the 20-hour test, keep your prior-year compensation at $96,000 or less, and you are a qualifying employee whose leave pay earns the credit right alongside everyone else’s.

One bonus in the S corporation: the family exclusion does not apply to a corporation. Your spouse and your child on the S corporation payroll have real FUTA wages, so their leave pay can produce a credit where the same wages in a proprietorship would produce none.

C Corporation

Yes, up to $96,000. The owner-employee draws W-2 wages subject to FUTA and qualifies if prior-year compensation was $96,000 or less. The difference is downstream: the C corporation claims the credit against its own tax rather than passing it through to you.

Example: S Corporation

Your S corporation employs you and three other people. Your 2025 W-2 was $88,000. Your written policy gives every qualifying employee six weeks of paid family and medical leave at 100 percent of normal wages. In 2026 you take the full six weeks for the birth of your child.

Your normal hourly rate is $42.31 ($88,000 divided by 2,080 hours). Six weeks at 40 hours is 240 hours, so the wages you count are $10,154. Your rate of payment is 100 percent, which puts your applicable percentage at the 25 percent maximum.

Your credit on your own leave is $2,538. Add the credits earned on your three employees, and the S corporation passes the whole amount through to you on your Schedule K-1.

Two cautions on this example: The leave pay has to be made under the written policy and specifically designated for the FMLA purpose. Simply letting a salaried owner’s paycheck run uninterrupted through the six weeks does not get you there.24 And Section 280C(a) makes you cut your wage deduction by the amount of the credit, so the $2,538 is not $2,538 of pure cash.

Claiming It

You claim the credit on Form 8994 and carry it to Form 3800. Partnerships and S corporations file Form 8994 and pass the credit through to their owners. Because this is a general business credit, it is subject to the Section 38 limitation, with the usual one-year carryback and 20-year carryforward.

Section 280C(a) reduces your deduction for wages by the amount of the credit. Under the OBBBA, that haircut now applies to your premium deduction under the premium method, not just to your wage deduction under the wage method.

You may rely on Notice 2026-28 for tax years beginning after December 31, 2025, and before the proposed regulations come out. If you want to weigh in on how the IRS should let you allocate a blended premium, written comments are due October 16, 2026.

A Word of Caution on Owner Leave

Nothing in Section 45S excludes an owner-employee, and unlike the work opportunity credit, Section 45S carries no related-individual rule. But the IRS has never addressed owner-employees—not in Notice 2018-71, not in the Form 8994 instructions, and not in Notice 2026-28. Meanwhile, Section 45S(f) says the IRS decides whether an employee meets the requirements, based on information you supply.

Translation: Document your own leave exactly the way you would document an employee’s, including dates, the FMLA purpose, the payroll records, and a written policy that was in place before the leave began.

Takeaways

The paid family and medical leave credit is permanent now, which makes it worth building into your 2026 planning rather than treating it as a one-time windfall. Keep these five points in front of you:

The credit runs from 12.5 percent to 25 percent of qualifying leave pay, depending on how much of normal wages your policy replaces.

A qualifying employee needs a year of service (or six months, if you elect it), at least 20 hours a week, and 2025 compensation of $96,000 or less.

The new premium method can produce a credit in a year when no employee takes a single day of leave.

Your own leave creates a credit only if you draw a W-2 salary. The S corporation and the C corporation are in. The proprietorship and the partnership are out.

In a proprietorship, wages to your spouse or your under-21-year-old child are exempt from FUTA and therefore produce no credit. Put the same people on a corporate payroll, and those wages count.

As always, run the numbers before you move on this. And if you operate as an S corporation, run the numbers next to your Section 199A calculation, because the family and medical leave reduces salary that could reduce your Section 199A deduction if you are above the thresholds.