IRS Publication 5366 – IRS Publication 5366 (October 2019) is a concise one-page fact sheet from the Internal Revenue Service that highlights a valuable tax incentive for employers: the Employer Credit for Paid Family and Medical Leave under Internal Revenue Code Section 45S. Originally introduced by the 2017 Tax Cuts and Jobs Act, this credit rewards businesses that voluntarily offer paid leave for family and medical reasons.
As of 2026, the credit is now permanent thanks to the One Big Beautiful Bill Act (OBBBA, Public Law 119-21, enacted July 4, 2025), with important enhancements that make it even more attractive for employers. This SEO-optimized guide explains everything from the original Publication 5366 details to current eligibility, calculation methods, claiming process, and updates for tax years beginning in 2026.
What Is IRS Publication 5366 and Why Does It Matter?
Publication 5366 serves as an easy-to-read introduction to the credit during National Work and Family Month (October). It emphasizes that employers with a qualifying written policy can claim a tax credit for wages paid during eligible family and medical leave.
Key points from the 2019 publication:
- Employers must maintain a written policy offering at least 2 weeks of paid family and medical leave to full-time employees (prorated for part-time).
- Paid leave must be at least 50% of the employee’s normal wages.
- Qualifying employees generally need 1 year of service and compensation below a specified threshold in the prior year.
- The credit is claimed on Form 8994.
- Originally effective for wages paid in tax years beginning after December 31, 2017, and before January 1, 2020 (later extended multiple times).
While Publication 5366 provides a solid starting point, rules have evolved significantly. Always refer to the latest IRS guidance for your tax year.
Example of IRS Form 8994 (Employer Credit for Paid Family and Medical Leave) – The form used to calculate and claim the credit.
Current Status in 2026: The Credit Is Now Permanent with Enhancements
The credit no longer faces sunset dates. Under the OBBBA:
- It is permanent for tax years beginning after December 31, 2025.
- Employers can now claim the credit for premiums paid for qualifying paid family and medical leave insurance plans (in addition to direct wages).
- Qualifying employee service requirement reduced to as little as 6 months (per U.S. Department of Labor guidance).
- Expanded access for part-time employees working 20+ hours per week.
- State- or locally mandated paid leave can help satisfy policy requirements in many cases.
These changes make the benefit more accessible and flexible for businesses of all sizes.
Illustration of paid family and medical leave in action – Supporting new parents and family caregivers strengthens employee retention and workplace culture.
Who Qualifies for the Employer Credit?
Eligible Employers
Any employer (including tax-exempt organizations in limited cases) that:
- Maintains a written policy providing paid family and medical leave.
- Meets minimum leave requirements (at least 2 weeks for full-time employees at ≥50% pay, prorated for part-time).
- For employees not covered by Title I of the FMLA, includes “non-interference” and non-discrimination language in the policy.
The policy must be in place before the leave is taken and must apply to all qualifying employees without improper exclusions.
Qualifying Employees
- Employed by the employer for the required period (6 months under current OBBBA rules; previously 1 year).
- Compensation in the preceding year does not exceed the applicable limit (60% of the highly compensated employee threshold under IRC Section 414(q)(1)(B)(i) — e.g., $96,000 for 2026 claims based on 2025 compensation).
- Defined under the Fair Labor Standards Act (FLSA).
What Counts as Qualifying Paid Family and Medical Leave?
Leave must be specifically designated for purposes matching the federal Family and Medical Leave Act (FMLA), including:
- Birth of a child and caring for the newborn.
- Placement of a child for adoption or foster care.
- Caring for a spouse, child, or parent with a serious health condition.
- Employee’s own serious health condition preventing job performance.
- Qualifying exigency due to a family member’s active military duty.
- Caring for a covered service member with a serious injury or illness.
Important exclusions: General vacation, personal leave, or sick leave not tied to FMLA reasons does not qualify. Leave paid entirely by state/local government or mandated by law is generally not counted toward the credit (though it may help satisfy the policy minimum under OBBBA rules).
Maximum leave per employee per year for credit purposes: 12 weeks.
How Much Credit Can Employers Claim?
The credit equals 12.5% to 25% of qualifying wages (or premiums) paid during eligible leave.
- Base rate: 12.5% if the policy pays at least 50% of normal wages.
- Increases by 0.25 percentage points for each additional percentage point above 50%, up to a maximum of 25%.
Example:
- Employee earns $1,000/week and takes 4 weeks of leave paid at 75% ($3,000 total paid).
- Applicable percentage: 12.5% + (25 points over 50% × 0.25%) = 18.75%.
- Credit: $3,000 × 18.75% = $562.50.
Wages used cannot exceed the employee’s normal hourly rate × hours of leave (capped at 12 weeks total). The credit is part of the general business credit (Form 3800) and is nonrefundable but can be carried back/forward in some cases.
New under OBBBA: Credit also available for premiums paid to insurance providers for qualifying paid leave policies.
Step-by-Step: How to Claim the Credit on Your Taxes?
- Adopt and document a qualifying written policy.
- Pay qualifying wages or premiums during eligible leave.
- Complete Form 8994 (Partnerships and S corporations must file it; others may report directly on Form 3800).
- Attach to your timely filed tax return (or amended return within 3 years).
- Reduce your wage deduction by the credit amount claimed.
Recordkeeping tip: Retain the written policy, employee names/SSNs, wages paid during leave, applicable percentages, and calculations for as long as they may be material to tax administration.
Benefits of Offering Paid Family and Medical Leave + Claiming the Credit
- Tax savings: Directly reduces your tax liability.
- Talent attraction & retention: Modern family-friendly policies help recruit and keep top talent.
- Compliance & goodwill: Supports employee well-being and aligns with evolving state paid-leave laws.
- No double-dipping: Wages/premiums used for this credit cannot be used for certain other credits.
Final Thoughts & Next Steps
IRS Publication 5366 was the original spotlight on this powerful incentive, and the credit has only grown stronger — now permanent and expanded under the One Big Beautiful Bill Act for 2026 and beyond.
Action items for employers:
- Review or create your written paid leave policy to meet current requirements.
- Download the latest Form 8994 and instructions at IRS.gov.
- Consult your tax advisor or CPA to maximize the credit for your specific situation and ensure compliance with both federal and state rules.
For the most up-to-date official information, visit:
- IRS Section 45S FAQs
- Form 8994 page
- U.S. Department of Labor resources on paid leave
By offering paid family and medical leave and claiming the Section 45S credit, forward-thinking employers can support their teams while enjoying meaningful tax benefits. Start planning today for a stronger, more supportive workplace in 2026 and beyond.
This article is for informational purposes only and is not tax or legal advice. Tax rules can be complex—consult a qualified tax professional or the IRS for guidance specific to your business.