Key to remember:
IRS gives employers another way to calculate the OBBBA paid leave credit
08/19/2026
New premium method
The IRS has issued guidance on the federal paid family and medical leave tax credit under the One, Big, Beautiful Bill Act (OBBBA). The guidance explains how employers may calculate the credit for tax years beginning in 2026.
Employers may use one of two methods to calculate the credit:
- Wage method: This method is based on the wages an employer pays to qualifying employees while they’re on family and medical leave.
- Premium method: This method is available when an employer has an insurance policy that provides paid family and medical leave. The credit is based on the premiums the employer paid or incurred for that policy during the tax year.
New premium method
The premium method is new. It may be helpful for employers that provide paid leave through an insurance policy instead of paying wage replacement directly from their own funds.
Under the premium method, employers calculate the credit based on the insurance premiums. They don’t need to determine whether any qualifying employees actually took family and medical leave during the tax year.
Employers also don’t need to include paid leave required under state law when calculating the federal credit.
If an insurance premium covers both creditable and noncreditable leave, employers must divide the premium between the two. For example, a blended premium may cover both qualifying paid family and medical leave and other types of leave, or it may cover both qualifying and non-qualifying employees.
Employers may use both methods, but not for the same leave. If, for example, an employer claims the credit for an insurance premium, it may not also claim the wage credit for benefits later paid from that same premium.
If a leave benefit is paid partly by insurance and partly from the employer’s general funds, the employer may claim the premium credit for the insurance-funded portion and the wage credit for the employer-funded portion.
Employers can claim the credit using IRS Form 8994, Employer Credit for Paid Family and Medical Leave.
Employers now have more than one way to calculate the federal credit for providing paid family and medical leave under the OBBBA.
This article was written by Darlene M. Clabault, SHRM-CP, PHR, CLMS, of J. J. Keller & Associates, Inc. The content of these news items, in whole or in part, MAY NOT be copied into any other uses without consulting the originator of the content.
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