Going Beyond Washington Paid Leave? There's a Federal Credit for That
If your business pays for qualifying family and medical leave, you may be able to claim a federal tax credit under Internal Revenue Code Section 45S. The credit can be calculated using qualifying wages paid during leave. Starting with tax years beginning in 2026, eligible employers with qualifying insurance coverage can also use a premium method, even if no employee takes leave that year. Washington’s required Paid Family & Medical Leave (PFML) is not itself creditable. The practical question is whether your business funds qualifying benefits beyond the state requirement.
The key guardrail: Washington’s mandate is not creditable
Washington PFML is a state-mandated program. The premiums and benefits required by state law cannot be included in the Section 45S credit calculation. Paying Washington PFML premiums does not, by itself, create a federal credit.
That distinction matters as the state rate changes. Starting January 1, 2027, Washington’s PFML premium rate will be 1.2% of wages. Employers will pay 29.3% of that total premium and employees will pay 70.7%. Businesses with fewer than 50 employees generally do not pay the employer share unless they opt in. These are state program rules, not a new source of creditable federal premiums. Washington’s Employment Security Department explains the 2027 rate and split.
What may count: benefits beyond the state requirement
The credit may be worth reviewing if your business pays for additional qualifying benefits beyond what Washington requires. Examples to discuss with your tax professional include:
Additional paid parental leave beyond the state benefit.
Employer-paid wage top-ups during qualifying leave.
Extra paid sick days, if the leave and benefit meet Section 45S requirements.
These are examples to review, not guarantees. A benefit’s name alone does not make it eligible. Its purpose, terms, funding, eligible employees, and relationship to the state mandate all matter. I would not assume that every extra day off, or every wage supplement, qualifies without checking the rules.
Under the wage method, the credit is generally 12.5% to 25% of qualifying wages paid during leave. The applicable percentage depends on the policy’s wage-replacement rate. Generally, the policy must replace at least 50% of normal wages to qualify; the credit rate rises from 12.5% at 50% replacement to 25% at 100% replacement. The credit applies to qualifying paid leave, not the full payroll or the Washington PFML premium.
What changed in 2026: the premium method
Notice 2026-28 adds a premium method for eligible employers that maintain an insurance policy providing qualifying paid family and medical leave. Under this method, an employer can calculate the credit using qualifying employer-paid insurance premiums instead of wages paid while an employee is on leave.
The practical difference is that the premium method does not require an employee to take leave during the tax year. A credit may be possible in a year with no leave claims, provided the premiums fund qualifying coverage and the employer meets the applicable requirements.
This is not a credit for the cost of any leave-related insurance. A premium can support the credit only to the extent it funds benefits that would qualify under the wage method. The portion funding state-required leave is not creditable. Nor is coverage for nonqualifying employees or benefits that do not meet Section 45S’s rules.
If one policy combines qualifying and nonqualifying coverage, the employer must allocate the premium between the two. Notice 2026-28 requires a reasonable method that fits the policy terms, uses objective criteria, is applied consistently, and is supported by records created at the time.
Eligibility and records to check
The credit has additional requirements. Among them, eligible employees generally must customarily work at least 20 hours per week. Employers may elect a six-month service requirement for employees, rather than using the default 12-month period.
The employer must also review the written policy and other Section 45S rules. If you are considering the credit, keep records that show what your business paid for and how you reached your calculation. These may include:
The written leave policy, including wage-replacement terms and any service requirement.
Payroll records showing qualifying wages paid during leave.
Insurance policy documents and statements showing employer-paid premiums.
A clear breakdown of state-required coverage and any additional employer-funded benefits.
The method used to allocate blended premiums, along with supporting records.
An employer may use the wage method for some leave and the premium method for other leave. But the same benefit cannot be claimed under both methods. If a premium funded a benefit and the employer claims the credit for that premium, the employer generally cannot also claim a wage credit for that same benefit.
Taxpayers may rely on IRS Notice 2026-28 for tax years beginning after December 31, 2025, and before proposed regulations are issued. Because the notice covers technical details, including how to classify and allocate benefits, review your facts with a qualified tax professional before claiming the credit.
A simple way to check whether it’s worth reviewing
Start with a short list:
List the benefits your business funds beyond Washington’s requirement. Separate state-mandated PFML from any additional employer-paid leave or coverage.
Check who is covered. Review weekly work hours, service periods, and the policy’s written terms.
Identify how the benefits are funded. The premium method applies to qualifying insurance premiums paid or incurred by the employer. The wage method applies to qualifying wages paid during leave.
Gather records before year-end. Keep policy documents, payroll details, premium statements, and any allocation calculations together.
Talk with your bookkeeper or tax preparer. Ask them to review the benefits and records before deciding whether to claim a credit.
This is a planning topic, not a filing emergency. Washington’s required PFML does not earn the federal credit. But if your business funds additional qualifying leave, it may be worth reviewing the details, especially now that a premium-based calculation is available for 2026.
I know benefits rules can feel like one more layer of paperwork. We can help you keep payroll and bookkeeping records organized, identify questions to bring to your tax professional, and make the review feel manageable. You can learn more about our bookkeeping and tax services.
This article is for general information and is not tax or legal advice. Credit eligibility depends on your specific policy, employees, and records.
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