By The paid family and medical leave tax credit is now a permanent part of the tax code, and the 2026 rules changed enough that it deserves a fresh look even if you considered it before and passed.
Here is what the credit does: If you have a written leave policy in place, you earn a credit ranging from 12.5 percent to 25 percent of qualifying leave pay, depending on how much of normal wages your policy replaces. A policy paying 100 percent of normal wages earns the full 25 percent.
Three changes matter most for 2026.
First, a new premium method lets you compute the credit on insurance premiums rather than leave wages—which means you can earn a credit in a year when no employee takes a single day of leave.
Second, if you operate in a state with a paid leave mandate, state-required and state-paid leave now counts toward whether your policy provides enough leave. That change alone can move you from ineligible to eligible. You still compute the credit only on the leave pay you fund yourself.
Third (and this may be the most important point for you), whether your own leave earns a credit depends entirely on your entity structure. The credit requires FUTA wages. If you operate as an S corporation or a C corporation and draw a W-2 salary, your own leave can generate a credit, provided your prior-year compensation was $96,000 or less. If you operate as a proprietorship or partnership, it cannot—no amount of planning changes that.
One caution: Document your own leave exactly as you would an employee’s, with dates, the leave purpose, payroll records, and a policy in place before the leave begins.
If you want to discuss the family and medical leave credit, please call me directly at 408-778-9651.