Employers typically compare the economics of the wage-based method, the premium-based method and, where applicable, a combination of the two approaches. Employers with substantial populations of employees below the compensation threshold may find the wage-based calculation attractive, while employers utilizing insured leave arrangements may determine that the premium-based election provides a more predictable benefit. Employers may also consider modeling whether any portion of insurance premiums funds noncreditable leave, nonqualifying employees or state-required benefits, because those amounts generally cannot be included in the premium-based credit calculation.
Section 45S contains a number of additional technical requirements beyond the basic qualification and calculation rules discussed above. Aggregation of related company rules, limits on qualifying leave, coordination with other federal tax credits and special rules for certain employers may affect the availability or amount of the credit. Because the law was substantially revised, and because the Treasury and the IRS have indicated that proposed regulations are expected, employers are recommended to monitor and consider additional guidance before making long-term plan design or tax reporting decisions.
State-mandated leave can help satisfy eligibility requirements
Historically, employers operating in states with mandatory paid leave programs often struggled to qualify because state-required benefits generally could not be considered when determining eligibility under section 45S.
Beginning in 2026, PFML required by state or local law may be taken into account when determining whether an employer satisfies the federal eligibility requirements. However, leave required by state or local law generally remains excluded from the credit calculation itself. For employers with insured arrangements, current IRS guidance similarly indicates that premiums are not creditable to the extent they fund leave required by state or local law or paid for by a state or local government.
This change may substantially increase the number of employers eligible to claim the credit, particularly in states such as California, New York, New Jersey and Massachusetts. However, employers in those states may still need to separate amounts that help establish eligibility from amounts that actually generate the credit.
Example: Assume a smaller employer in a mandatory-leave state pays $30,000 of leave wages required under the state's PFML program and does not provide additional qualifying wage replacement or insured coverage beyond the state-required minimum. The employer may satisfy the federal eligibility requirements using the state-mandated program, but because those benefits generally remain excluded from the credit calculation, the employer may generate little or no section 45S credit. Employers operating in mandatory-leave states should model the available credit carefully rather than assuming that eligibility will translate into a meaningful tax benefit.
Expanded employee eligibility
OBBBA also allows employers to elect a six-month service requirement rather than requiring one full year of employment, potentially expanding the population of employees capable of generating eligible credit amounts. OBBBA also limits qualifying employees to individuals customarily employed for at least 20 hours per week.
Is the credit meaningful for middle market employers?
Whether section 45S represents a meaningful tax opportunity depends not only on eligibility, but also on workforce composition, employer size, plan design, insurance arrangements and the method used to calculate the credit. Many employers may qualify for section 45S yet generate only a modest benefit, while others may be able to offset a meaningful portion of their paid leave costs.
For employers using the wage-based approach, workforce composition can significantly affect the available credit. A professional services, engineering or technology company with a predominantly six-figure workforce may technically qualify for the credit while generating relatively little benefit because relatively few employees satisfy the compensation requirements applicable to the wage-based calculation. By contrast, employers in manufacturing, distribution, retail, hospitality and health care often employ larger populations of workers whose compensation falls below the applicable threshold, increasing the amount of leave wages that may qualify for the credit. While workforce compensation levels can significantly affect the amount of credit available under the wage-based method, employers with insured arrangements may find that the premium-based method produces benefits even where relatively few employees generate significant wage-based credits.
Employer size can also influence the economics. Larger middle market employers generally have larger workforces, higher volumes of qualifying leave and, in some cases, larger paid leave insurance programs. Those factors can allow both wage-based and premium-based credits to accumulate more quickly.
For example, a manufacturer with 1,000 employees and 40 qualifying leave events resulting in $320,000 of eligible leave wages could potentially generate an $80,000 credit at the maximum 25% rate. While not large enough to cover the entire cost of a leave program, the benefit could meaningfully offset employer costs.
A smaller employer could satisfy the same eligibility requirements yet generate a much smaller credit simply because it has fewer employees, fewer qualifying leave events or lower premium expenditures.
For some employers, the premium-based election may shift the analysis from forecasting employee leave utilization to evaluating the cost of maintaining insured paid leave coverage. Because the credit is tied to qualifying premiums paid or incurred rather than actual leave utilization, employers with insured arrangements may be able to generate credits even during years with relatively few leave events. However, employers should not assume that the full premium is creditable, particularly where the policy covers other leave, nonqualifying employees or state-required benefits.
Ultimately, employers that are most likely to realize significant value from section 45S are those with a sizeable population of eligible employees, meaningful leave-related expenditures or insured leave arrangements and sufficient scale for the resulting credit to offset a meaningful portion of program costs.
Evaluating workforce composition, leave practices, insurance arrangements and premium allocation data can help determine whether the wage-based method, the premium-based method or a combination of the two approaches produces the greatest benefit.
Practical considerations before claiming the credit
Section 45S is a technically complex credit that requires careful documentation and analysis.
Employers may benefit from evaluating:
- Workforce compensation profiles
- Existing paid leave policies
- Employee leave utilization patterns
- State-law leave requirements and state-funded benefits
- Available insurance arrangements and whether policies include blended coverage
- Premium allocation methodology and contemporaneous documentation
- Interactions with other federal tax incentives
Employers should also remember that deductible wage or premium expenses generally must be reduced by the amount of credit claimed, meaning the gross credit amount may overstate the actual after-tax benefit.
How RSM US can help
The section 45S credit, as recently amended, presents a broader planning opportunity, but the economics vary substantially among employers.
A workforce analysis can help identify the population of credit-eligible employees, compare wage-based and insurance-based credit approaches and estimate the net value of the credit under different utilization and premium allocation scenarios. For many employers, the most valuable exercise is not calculating the credit itself but determining whether the expected benefit is large enough to justify policy changes or additional administrative effort.
For employers with insured PFML arrangements, the analysis should also consider whether the policy funds only creditable coverage, whether any blended premium must be allocated and what records support the allocation. Until additional guidance is issued, consistent methodology and contemporaneous documentation will be especially important.
As employers consider paid leave programs, understanding both the eligibility rules and the scale of the potential opportunity may provide a clearer picture of whether section 45S can meaningfully offset the cost of providing PFML.
