Your Employer Now Has Two Ways to Claim a Paid Leave Tax Credit: What That Could Mean for Your W-2 and Withholding

TL;DR: IRS Notice 2026-28, issued August 5, 2026, gives employers two methods to claim the Section 45S paid family and medical leave (PFML) tax credit: the traditional wage method and a new premium method based on insurance premiums. This change, made permanent by the One Big Beautiful Bill Act, could affect how your employer structures your paid leave benefits, what appears on your W-2, and how your withholding is calculated. If those changes create an unexpected tax bill, tax debt relief options are available.

By Fresh Start Initiative

If you have ever taken time off to welcome a new child, care for a sick family member, or recover from a serious health condition, your employer may have paid you at least part of your salary during that leave. What you may not know is that your employer can claim a federal tax credit for doing so. And as of this year, the rules just got bigger and more permanent.

The IRS and Treasury Department issued Notice 2026-28 on August 5, 2026. It explains how employers can now choose between two methods to calculate a credit that Congress made permanent for the first time. That permanence matters to you, because it gives employers a strong, lasting reason to expand or restructure their paid leave programs. And any change to your employer’s leave plan can ripple into your paycheck, your W-2, and potentially your year-end tax bill.

This article breaks down what Notice 2026-28 actually says, what it means for workers, and what to do if an unexpected tax balance appears on your return because of a change in your leave pay.

What Is the Section 45S Paid Family Leave Tax Credit?

Section 45S of the Internal Revenue Code is a general business tax credit that rewards employers who voluntarily offer paid family and medical leave. Think of it as the federal government sharing part of the cost when your employer keeps paying you while you are on leave.

To qualify for the credit, employers must have a written policy that meets specific requirements. That policy must offer at least two weeks of paid leave per year to qualifying employees, and the pay during leave must be at least 50 percent of the employee’s normal wages. The IRS Section 45S FAQ page has more details on written policy requirements.

Before this year, the credit was temporary, meaning Congress had to keep renewing it. That cycle of uncertainty made many employers reluctant to build their benefits programs around it. That has now changed in a fundamental way.

What Notice 2026-28 Actually Changed

The Treasury Department’s press release on Notice 2026-28 highlights three major shifts that affect both employers and workers.

The credit is now permanent. The One Big Beautiful Bill Act, signed July 4, 2025, permanently extended Section 45S. Prior to this law, the credit was a temporary provision prone to expiration. Permanence means employers can confidently invest in paid leave programs without fearing the credit will vanish next year.

There are now two calculation methods. Employers can use either the wage method (a percentage of wages paid to employees while they are actually on leave) or a brand-new premium method (a percentage of insurance premiums paid for a qualifying paid family leave insurance policy). Employers may use both methods but may not claim both credits for the same leave benefit.

More employees are now covered. Employers may elect to reduce the minimum employment period from one year to six months, making more recently hired workers eligible. The credit is now also explicitly available for qualifying part-time employees who work at least 20 hours per week.

The Wage Method vs. The Premium Method: A Side-by-Side Look

Understanding the difference between these two methods helps you anticipate how your employer might restructure your leave benefits and what that restructuring could mean on paper at tax time.

Feature	Wage Method	Premium Method
What the credit is based on	Wages actually paid to employees while on leave	Premiums paid for qualifying PFML insurance policy
Must employees actually take leave?	Yes, credit is tied to leave taken	No, employer can claim credit even if no one took leave that year
Credit percentage range	12.5% to 25% of qualifying wages	12.5% to 25% of qualifying premiums
Maximum leave weeks covered	Up to 12 weeks per employee per year	Up to 12 weeks’ worth of equivalent coverage per employee
Minimum wage replacement required	At least 50% of normal wages	Policy must fund at least 50% of normal wages
Employee service requirement	At least 1 year (or 6 months if employer elects)	Same eligibility rules as wage method apply
State law leave counted toward eligibility?	Yes	Yes
State law leave counted in credit calculation?	No	No

The key practical difference: under the premium method, an employer that buys a qualifying paid leave insurance policy can earn a federal tax credit even in a year when none of its workers actually took leave. That is a significant incentive for employers to switch from self-funded leave to insured leave, and that switch can change how your leave pay is administered and reported.

How This Could Show Up on Your W-2 and Affect Your Withholding

This is where the policy shift starts to feel personal. When your employer changes how it provides paid leave, that can change how your leave wages are classified, who technically pays them (your employer directly, or an insurance carrier), and what gets withheld from those payments.

Here is what to watch for as an employee:

1. Review your pay stubs during any leave period. If your employer moves to an insured model under the premium method, your leave pay may come from a third-party insurance carrier rather than directly from your employer’s payroll. The withholding practices of insurance carriers can differ from your normal payroll.
2. Check Box 1 of your W-2 carefully. Wages paid to you during leave are generally included in your taxable wages. If the source of your leave pay changes, confirm that your W-2 reflects the full amount.
3. Watch for a W-2c if corrections occur. If your employer discovers a reporting error in leave wages, they are generally required to issue a corrected W-2 using Form W-2c. Do not ignore one if it arrives.
4. Update your withholding if your income pattern changes. If your employer now covers more employees or longer leave periods, and you take leave, your income during that period may be taxed at a different effective rate than your normal paycheck suggests. Use the IRS Tax Withholding Estimator to recalculate.
5. Ask HR what method your employer is using. You have every right to ask whether the company is using the wage method or the premium method, and whether the source of your leave pay has changed. Understanding the structure protects you at tax time.
6. Confirm part-time status impacts. If you work at least 20 hours per week, you may now be covered under a leave policy where you were not before. Confirm your eligibility with HR and understand how a new leave benefit would be paid and taxed.
7. Plan for any income replacement gap. The credit requires employers to pay at least 50 percent of normal wages. If your employer has historically paid less during leave and is now restructuring to qualify for the credit, your leave income may actually increase, which means higher taxable wages during that period.
8. File accurately and on time. If your W-2 looks different this year because of a leave policy change, do not delay filing. An unexplained discrepancy between what you expected and what is reported can feel confusing, but filing on time prevents interest and penalties from piling up.

Who Actually Qualifies Under the New Rules

The expanded credit is designed to pull more employers and employees into the program. Here is a plain-English summary of the qualifying conditions as updated by the One Big Beautiful Bill Act and clarified in Notice 2026-28.

For employees to generate a credit for their employer, they must have worked for that employer for at least one year, or at least six months if the employer elects the shorter period. The credit is limited to employees whose compensation in the prior year did not exceed a threshold tied to the IRS definition of a highly compensated employee. For the current year, that threshold is $96,000 (adjusted annually for inflation). This means the credit is targeted at workers who are not already considered highly paid.

Qualifying leave reasons include the birth or adoption of a child, caring for a spouse, child, or parent with a serious health condition, and recovering from a serious health condition that prevents the employee from working. State-mandated paid leave counts toward determining whether an employer’s overall program qualifies, but the wages or benefits required by state law cannot be included in the actual credit calculation.

What This Means If You Already Have a Tax Problem

Changes to how your employer pays and reports leave wages can occasionally create unexpected tax situations. Maybe you received leave pay from an insurance carrier and not enough was withheld. Maybe your income was higher during a leave period than you expected, and your estimated payments did not keep up. Maybe a W-2c arrived after you already filed and now the IRS is questioning the discrepancy.

If any of these situations sounds familiar, you are not alone, and you are not in trouble yet. But leaving an IRS balance unaddressed is how a manageable situation becomes a serious one. Tax debt relief programs exist precisely for situations like this, where an unexpected income or reporting event leads to a balance you are not sure how to resolve.

The IRS offers several programs for people who owe taxes they cannot immediately pay, including installment agreements (monthly payment plans), Currently Not Collectible status for those facing genuine hardship, and Offers in Compromise for taxpayers who meet specific criteria. You can explore your tax debt relief options and see which program fits your situation.

Frequently Asked Questions

What is IRS Notice 2026-28 in plain language?

Notice 2026-28 is official guidance from the IRS and Treasury Department explaining how employers can claim the Section 45S paid family and medical leave tax credit under new rules made permanent by the One Big Beautiful Bill Act. It introduces a second calculation method, the premium method, based on insurance premiums rather than wages paid during leave. Employers may rely on this guidance for tax years beginning after December 31, 2025, while proposed regulations are still being developed.

Does the employer paid leave tax credit affect my personal taxes?

The credit itself is claimed by your employer, not you. However, it can indirectly affect you if it leads your employer to change how paid leave is structured, funded, or reported. Leave wages you receive are generally taxable income and must appear on your W-2. If your employer switches to an insured model or expands coverage, your leave income, withholding, or W-2 reporting could look different than in prior years. If that creates a tax balance, tax debt relief programs may help.

What is the difference between the wage method and the premium method?

The wage method calculates the credit based on actual wages paid to employees while they are on leave. The premium method, newly available under Notice 2026-28, calculates the credit based on premiums paid for a qualifying paid family and medical leave insurance policy. Under the premium method, an employer can claim the credit even if no employee actually took leave during the year. Both methods use the same percentage range (12.5% to 25%) and the same employee eligibility rules.

Can my employer use both the wage method and the premium method at the same time?

Yes, but with a key restriction. Employers may use both methods in the same year, but they cannot claim the credit twice for the same instance of leave. In other words, if an employee takes leave and both the insurance policy and direct wages are involved, the employer can only credit one method’s calculation for that specific leave event, not both.

I received unexpected leave income this year and now I owe taxes. What can I do?

First, confirm that your W-2 accurately reflects all wages paid to you, including any leave pay from a third-party insurance carrier. Then consider whether your withholding throughout the year was sufficient. If you now owe a balance, the IRS offers payment plans, hardship statuses, and other tax debt relief programs. Acting quickly prevents interest and penalties from compounding. You can see how IRS payment plans work and whether you qualify for relief.

Does state paid family leave affect the federal Section 45S credit?

State-mandated paid leave counts toward determining whether an employer’s overall leave program meets the requirements to qualify for the Section 45S credit. However, the wages or benefits that are specifically required by state or local law cannot be included in the credit calculation itself. Employers must separate out the mandated component and only apply the federal credit to the voluntary portion of their paid leave program that exceeds the state requirement.