Can Business Owners Claim the Paid Family Leave Tax Credit?
If you own a business and provide paid family or medical leave to employees, there's a federal tax credit you may be overlooking.
And beginning in 2026, there's an even more interesting question:
Can you claim the Paid Family Leave Tax Credit when the person taking leave is you—the business owner?
Depending on how your business is structured, the answer may be yes.
The federal Paid Family and Medical Leave Credit under Section 45S has been made permanent, and several important changes took effect beginning in 2026. Those changes make the credit worth another look even if your business considered it in the past and decided it wasn't useful.
There's also a major distinction among business entities. An owner-employee of an S corporation or C corporation may potentially generate the credit from qualifying paid leave. A sole proprietor or partner generally cannot.
What Is the Paid Family and Medical Leave Tax Credit?
Section 45S provides eligible employers with a federal general business tax credit for qualifying paid family and medical leave provided to eligible employees.
The credit generally begins at 12.5% of qualifying leave payments when the employee receives 50% of normal wages during leave.
The credit percentage increases as the percentage of wages replaced increases.
When a qualifying policy replaces 100% of the employee's normal wages, the credit can reach a maximum of 25% of qualifying payments.
There are limits. Generally, no more than 12 weeks of leave per employee per year can be counted, and the qualifying wages are limited based on the employee's normal hourly rate and the hours of leave taken.
What Changed With the Paid Family Leave Tax Credit in 2026?
Several significant changes took effect for tax years beginning after December 31, 2025.
Most importantly, the Paid Family and Medical Leave Credit is now permanent.
It had previously been scheduled to expire, which made it difficult for employers to justify building a long-term benefit program around it.
Other changes include:
- a new option to calculate the credit using qualifying paid-leave insurance premiums;
- a requirement that qualifying employees customarily work at least 20 hours per week;
- an option to treat employees as qualifying after six months of service instead of waiting a full year;
- changes to the controlled-group rules; and
- more favorable treatment of state-mandated paid-leave programs when determining whether an employer's policy qualifies.
For small employers, these changes can make a credit that was previously impractical much more interesting.
Can a Business Owner Claim the Paid Family Leave Tax Credit?
This depends heavily on the type of business you own.
The critical issue is whether the owner's compensation qualifies as wages for purposes of Section 45S.
Here's the basic distinction:
| Business Type | Can Owner's Leave Potentially Generate the Credit? |
|---|---|
| Sole Proprietorship / Schedule C | No |
| Partnership | No |
| S Corporation | Potentially Yes |
| C Corporation | Potentially Yes |
Why?
It comes down to whether the owner is actually an employee receiving qualifying wages.
Can a Sole Proprietor Claim the Credit for Their Own Leave?
No.
A Schedule C sole proprietor isn't an employee of their own proprietorship. The business's net profit is generally self-employment income rather than W-2 wages.
As a result, taking time away from your sole proprietorship for the birth of a child, a serious health condition or another qualifying family or medical reason doesn't generate the Section 45S credit for your own compensation.
You can potentially establish a qualifying paid-leave program for your employees, but you can't generate the credit from your own leave as the proprietor.
The same general problem applies to a single-member LLC that's disregarded for federal tax purposes and reported on Schedule C.
Can a Partner Claim the Credit for Their Own Leave?
Generally, no.
A partner isn't treated as an employee of the partnership for this purpose, and guaranteed payments to the partner aren't the type of wages required to generate the Section 45S credit.
The partnership may still claim the credit for qualifying leave provided to eligible non-partner employees.
The credit is calculated by the partnership and can then pass through to the partners.
But the partners themselves generally don't generate a credit from their own time away from the business.
Can an S Corporation Owner Claim the Paid Family Leave Credit?
Potentially, yes.
This is where the entity structure changes the answer.
An S corporation shareholder who works for the corporation generally receives W-2 wages. Those wages can be subject to federal unemployment tax rules and can potentially qualify for purposes of the Paid Family and Medical Leave Credit.
That means an S corporation owner-employee who meets the applicable requirements may be treated similarly to another qualifying employee when taking eligible family or medical leave.
There is an important income restriction, however.
For the 2026 credit, the qualifying employee's compensation for 2025 generally can't exceed $96,000.
The employee must also satisfy the applicable service requirement and generally must customarily work at least 20 hours per week.
Example: S Corporation Owner Takes Paid Parental Leave
Suppose you own an S corporation that employs you and three other people.
Your 2025 W-2 wages were $88,000.
Your company has a qualifying written paid-leave policy providing six weeks of family and medical leave at 100% of normal wages to all qualifying employees.
In 2026, you take six weeks of qualifying leave after the birth of your child.
Based on an $88,000 annual salary, your normal hourly wage is approximately $42.31.
Six weeks at 40 hours per week equals 240 hours of leave, producing approximately $10,154 of qualifying wages.
Because the policy replaces 100% of normal wages, the applicable credit percentage reaches the 25% maximum.
That produces a potential credit of approximately:
$2,538 for the owner's leave.
And that's before considering qualifying leave provided to the company's other employees.
Don't Simply Keep Paying Yourself and Call It Paid Leave
This is an important distinction for S corporation owners.
If you're a salaried owner and take six weeks away from work, simply allowing your normal paycheck to continue doesn't automatically transform those wages into qualifying paid family leave.
The payments need to be made under the employer's qualifying written policy and properly associated with the qualifying family or medical leave.
For an owner-employee, documentation is particularly important.
Keep records showing:
- the dates of the leave;
- the qualifying family or medical reason;
- the written leave policy in effect before the leave;
- payroll records showing the leave payments; and
- the calculation used to determine the credit.
Treat the owner's leave with the same formality you would use for any other employee.
Can a C Corporation Owner Claim the Credit?
Potentially, yes.
Like an S corporation owner-employee, a C corporation owner who works for the company and receives qualifying W-2 wages can potentially generate the credit if the other requirements are satisfied.
The major difference is where the tax benefit ultimately lands.
An S corporation generally calculates the credit and passes it through to its shareholders. A C corporation claims the credit against its own corporate income tax.
Can My Spouse or Child Generate the Credit?
This is another area where business structure can produce a surprising result.
In a sole proprietorship, wages paid to certain family members can be excluded from federal unemployment tax.
For purposes of this credit, that can mean wages paid by a proprietor to a spouse, a child under age 21 or a parent don't generate the Paid Family and Medical Leave Credit.
A corporation is different.
When a spouse or child legitimately works for an S corporation or C corporation and receives qualifying corporate wages, those wages aren't subject to the same family exclusion that applies to a proprietorship.
As a result, qualifying paid leave for family members on a corporation's payroll may potentially generate the credit.
Your Business Needs a Written Paid-Leave Policy
You can't decide after an employee takes leave that you'd like to call it a paid family leave program and claim the credit.
An eligible employer generally needs a written policy covering all qualifying employees.
The policy generally must provide full-time qualifying employees with at least two weeks of annual paid family and medical leave, with an appropriate prorated amount for part-time employees.
The policy must also provide at least 50% of the employee's normal wages during qualifying leave.
Depending on the employees covered by the Family and Medical Leave Act, additional non-interference and non-discrimination language may also be required.
One particularly important rule for owner-operated businesses:
You can't write a paid-leave policy that covers only the owner.
Qualifying employees need to be included.
Which Employees Qualify for the Credit in 2026?
Not every employee necessarily generates the credit.
For 2026, a qualifying employee generally must:
- meet the applicable length-of-service requirement;
- customarily work at least 20 hours per week; and
- have 2025 compensation of no more than $96,000.
Employers can generally use a one-year service requirement or elect to reduce that requirement to six months.
The compensation limitation is particularly important for small businesses with highly paid employees and owners.
What If Nobody Takes Family or Medical Leave?
This is one of the most interesting changes for 2026.
Under the traditional wage method, the employer generally needs an employee to actually take qualifying paid leave before there's something on which to calculate the credit.
Beginning in 2026, employers may have another option:
the premium method.
If your business purchases qualifying insurance that funds paid family and medical leave benefits, you may potentially calculate the credit based on qualifying insurance premiums—even in a year when none of your employees actually takes leave.
That changes the economics of the credit significantly.
How Does the New Paid-Leave Insurance Premium Credit Work?
Not every dollar of a paid-leave insurance premium automatically qualifies.
The insurance needs to fund benefits that would otherwise satisfy the requirements for qualifying family and medical leave.
If an insurance policy combines qualifying paid-leave coverage with other types of coverage, the employer may need to allocate the premium between qualifying and nonqualifying portions.
The allocation should use a reasonable, objective method that's consistent with the policy and supported by contemporaneous records.
Employers can potentially use both the premium method and the traditional wage method during the same year.
But you can't claim two credits for the same leave benefit.
If insurance funds part of an employee's qualifying leave and the business directly funds the remainder, the premium method may apply to the insured portion while the wage method applies to the employer-funded portion.
What If My State Already Requires Paid Family Leave?
The 2026 changes may make the federal credit more useful for employers operating in states with mandatory paid-leave programs.
Under the new rules, certain state-required or state-paid leave can help determine whether your overall policy provides enough leave to satisfy the federal eligibility requirements.
However, the business generally doesn't receive the federal credit on leave benefits required or paid by the state.
The credit is based on the qualifying portion funded by the employer.
For example, a state program might provide 60% of an employee's wages while the employer voluntarily provides another 40% so that the employee receives 100% of normal pay.
The state-provided leave may help the employer's policy satisfy the eligibility requirements, while the federal tax credit applies only to the qualifying amount funded by the employer.
The interaction between state programs and the federal credit can become technical, so employers in states with mandatory paid leave should have the arrangement reviewed before assuming the entire benefit qualifies.
How Do Businesses Claim the Paid Family Leave Tax Credit?
The Paid Family and Medical Leave Credit is generally calculated using Form 8994, Employer Credit for Paid Family and Medical Leave.
The credit then becomes part of the general business credit reported through Form 3800.
Partnerships and S corporations calculate the credit at the entity level and generally pass the appropriate credit through to their owners.
Because this is a general business credit, limitations can apply to how much you can use in a particular year. Unused qualifying credits may generally be carried back one year and forward for up to 20 years.
Remember: A Tax Credit Can Affect Your Business Deduction
There's another piece of the calculation that's easy to overlook.
You generally can't receive a tax credit for an expense and then deduct the exact same amount as though the credit didn't exist.
The rules therefore require an adjustment to the business deduction associated with expenses used to generate the credit.
That means a $2,500 credit isn't necessarily the same as putting an additional $2,500 of after-tax cash in your pocket.
The credit may still be valuable, but the net tax benefit should be calculated rather than assumed.
Should a Small Business Offer Paid Family and Medical Leave?
A tax credit shouldn't be the only reason you decide whether to offer an employee benefit.
But if you're already considering paid family or medical leave—or already providing it without claiming the credit—Section 45S deserves a closer look in 2026.
The fact that the credit is now permanent makes it easier to incorporate into long-term employee-benefit planning.
The new premium method may also make the credit useful even during years when nobody actually takes qualifying leave.
And for certain S corporation and C corporation owners, there's now another reason to examine the rules carefully: your own qualifying paid leave may generate a tax credit too.
Talk to Ken-Mar Tax Before Setting Up Your Paid-Leave Plan
The Paid Family and Medical Leave Credit has enough requirements that it's much easier to structure the benefit correctly before someone takes leave than to try to fix the documentation afterward.
Ken-Mar Tax can help business owners evaluate whether their employees qualify, how their business entity affects the owner's eligibility, how the credit interacts with payroll and other business deductions, and whether the wage or premium method makes sense.
If you're already paying employees during family or medical leave—or paying premiums for coverage that provides those benefits—you may have a federal business tax credit worth investigating.
