When I talk with small business owners about employee benefits, paid family or medical leave is usually discussed as a cost.
And I understand why.
For a small business, paying an employee while he or she is away from work can feel very different from how it feels for a large company with hundreds of employees. Every payroll dollar matters, and sometimes the owner is the person covering the missing work.
But there is another side of the conversation that many business owners do not realize:
Paid family and medical leave may also create a federal tax credit for the business.
The IRS recently issued new guidance expanding the employer credit for paid family and medical leave, and I think this is worth reviewing before automatically deciding that offering paid leave is simply too expensive.
What Changed?
The federal Paid Family and Medical Leave Tax Credit under Internal Revenue Code Section 45S has been made permanent and expanded.
Beginning in 2026, more employers may qualify, including businesses with employees who have worked for the company for at least six months and certain part-time employees who generally work 20 hours or more per week.
Another important change is that employers may now potentially claim the credit based not only on wages paid during qualifying leave, but also on certain premiums paid for paid family and medical leave insurance policies.
For eligible wage-based leave, the credit can range from 12.5% to 25% of qualifying wages, for up to 12 weeks of qualifying family and medical leave per employee during the tax year.
That can make the economics of providing a benefit look quite different.
This Is Where I Think Small Business Owners Should Be Careful
One thing I often see in working with business owners is that tax planning happens after a business decision has already been made.
The owner decides:
“We cannot afford this benefit.”
Or:
“We are going to offer this benefit because employees are asking for it.”
Then, months later, we look at the tax return.
I prefer to reverse that order.
Before making a significant compensation or employee-benefit decision, I think it makes sense to ask:
What will this actually cost the business after considering the tax effect?
That does not mean you should create an employee benefit simply to receive a tax credit.
A tax credit should almost never be the only reason to spend money.
But if you are already considering paid family or medical leave, understanding the potential credit can help you calculate the true cost more accurately.
An Example
Imagine a small business has an employee who needs several weeks away from work because of a qualifying family or medical situation.
The owner wants to continue paying part of the employee’s wages during that period.
Without considering taxes, the owner may only see the payroll cost.
But if the leave program satisfies the federal requirements, a portion of those qualifying wages may generate a business tax credit.
That means the actual after-tax cost could be lower than the amount shown on payroll.
This is why I tell business owners not to look at payroll decisions and tax planning as two completely separate things.
They are often connected.
What About California Employers?
For California businesses, this area deserves extra attention because state-required leave programs and federal tax-credit rules do not necessarily operate the same way.
Under the newly expanded federal rules, certain leave provided under state or local mandates may help satisfy eligibility requirements for the federal credit, although those mandated amounts are not necessarily included when calculating the federal credit itself.
That distinction matters.
Just because your business provides leave does not automatically mean every dollar qualifies for the federal credit.
The written leave policy, the employee’s eligibility, the reason for the leave, the amount paid, and how the benefit is structured all matter.
Don’t Wait Until Tax Return Time
This is probably the most important point I would make to a business owner.
If you think your business may want to use this credit, don’t wait until your tax return is being prepared to start thinking about it.
Review the policy first.
Keep documentation of qualifying leave.
Track the wages or insurance premiums separately.
And make sure the program is structured correctly before assuming that a tax credit will be available.
Trying to reconstruct these details months later is much harder.
My Takeaway for Small Business Owners
Employee benefits are becoming an increasingly important part of running a competitive business.
But small business owners cannot evaluate benefits exactly the same way large corporations do.
You have to understand the numbers.
When a business owner asks me whether something like paid family leave is “too expensive,” I would not answer that question by looking only at the payroll cost.
I would want to know:
What does the benefit cost?
What tax credit may be available?
What administrative requirements come with it?
And does it make sense for this particular business?
That is the type of tax planning conversation that should happen before the year is over, not when the tax return is already being prepared.
If your business currently offers paid family or medical leave—or you are thinking about adding it—2026 may be a good year to review your policy and determine whether the expanded federal credit applies.
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Tax Planning | Tax Preparation | Accounting for Small Businesses
This article is for general informational purposes and does not constitute tax or legal advice. Eligibility for the Section 45S credit depends on the specific facts and structure of the employer’s leave program.
Official IRS Source:
Treasury and IRS, IR-2026-86, “Treasury, IRS Issue Guidance on the Permanent Expansion of Paid Family and Medical Leave under the Working Families Tax Cuts,” August 5, 2026.