From the official announcement by IRS ↗
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have released Notice 2026-28, guidance that instructs businesses on how to calculate the federal tax credit for employers who provide paid leave for family and medical reasons. According to the IRS notice issued on August 5, 2026, this tax credit – which was previously only a temporary provision – has been made permanent through the Working Families Tax Cuts Act.
The most significant change involves how to calculate the tax credit. Previously, businesses could only deduct based on wages paid to employees during their leave. Starting in 2026, they have an additional option to calculate the credit based on paid leave insurance premiums that the company has purchased for employees, and may choose between these two methods as long as they do not claim both for the same leave instance.
Regarding eligibility and scope of application, the requirements have been significantly expanded. Businesses can now claim the credit for employees with only six months of tenure, down from the previous one-year requirement, and for part-time employees working 20 hours or more per week. This is a meaningful change for nail salons, restaurants, and grocery stores owned by Vietnamese-Americans – establishments that typically employ many part-time or newly hired workers who previously did not qualify.
The tax credit ranges from 12.5 percent to 25 percent of wages paid to eligible employees, applied to a maximum of 12 weeks of paid leave per tax year, for cases where employees are recovering from serious illness or caring for seriously ill family members. If a state or local jurisdiction has mandatory paid leave laws, that leave time still counts toward meeting the federal tax credit eligibility requirements, but does not count toward the actual amount of the federal credit received.
Businesses may apply the guidance in Notice 2026-28 for tax years beginning after December 31, 2025, until proposed regulations are issued. The public may provide comments on this guidance by October 16, 2026. See the official IRS notice at the source link below.
Businesses can now calculate the tax credit based on paid leave insurance premiums, not just based on wages as before.
Analysis
This guidance comes after months of anticipation from the accounting profession. The American Institute of Certified Public Accountants (AICPA) previously sent a letter requesting the Treasury Department to clarify how to calculate the tax credit using the insurance premium method, because the new law took effect for the 2026 tax year but businesses lacked a basis for applying it. During a Senate hearing, Treasury Secretary Scott Bessent told Senator Deb Fischer that issuing guidance for this statute was an administrative priority for the Treasury Department. The permanent codification of the 45S tax credit, replacing the temporary provision previously in place, reflects a policy trend aimed at encouraging small businesses to voluntarily provide paid leave benefits without needing comprehensive federal mandatory leave laws like many other countries have.
Diaspora Impact
Small business owners – particularly nail salon, restaurant, and retail store operators run by Vietnamese-Americans – should review their companies' written paid leave policies to ensure they meet the new eligibility requirements before filing their 2026 taxes. Businesses wishing to provide comments on the guidance may submit feedback to the IRS before October 16, 2026. Employees, including part-time workers working 20 hours or more per week, should ask their employers whether the company is applying this benefit, since it is a voluntary option for businesses and not mandated by federal law. Readers do not need to submit any application to the IRS – the responsibility for claiming and calculating the tax credit rests with the business owner.