Paid Family and Medical Leave Credit Becomes Permanent: What Los Angeles Business Owners Need to Know (2026 and Beyond)

The One, Big, Beautiful Bill Act (OBBBA) permanently extends the Paid Family and Medical Leave Credit under IRC §45S, which was previously scheduled to expire after 2025.

For business owners in Los Angeles — including medical practices, dental offices, S-Corps, creative agencies, e-commerce companies, and high-income entrepreneurs — this is a significant development.

More importantly, OBBBA introduces a new alternative way to calculate the credit, expands employee eligibility, and tightens controlled group rules.

If structured correctly, this credit can meaningfully reduce federal tax liability. If structured incorrectly, it can be lost entirely.

Let’s break down what changed and how it applies to our clients.

What Is the Paid Family and Medical Leave Credit?

The credit allows eligible employers to claim a general business credit equal to:

• 12.5% of wages paid to qualifying employees during family and medical leave (up to 12 weeks),
• Increased by 0.25% for each percentage point the wage replacement exceeds 50%,
• Up to a maximum credit rate of 25%.

To qualify:

• The employer must have a written paid leave policy.
• Full-time employees must receive at least two weeks of paid leave annually.
• Part-time employees must receive a proportional amount.
• The leave must not simply be state-mandated leave.
• Employees must meet compensation limits.

Key Changes Under OBBBA

1. The Credit Is Now Permanent

This is no longer a temporary incentive. Business owners can incorporate it into long-term benefit planning.

2. Alternative Calculation Based on Insurance Premiums (Beginning 2026)

Previously, the credit was based only on wages paid during actual leave.

Beginning in tax years after December 31, 2025, employers may alternatively calculate the credit based on:

Insurance premiums paid for qualifying paid family leave policies

This is a major planning opportunity.

The percentage calculation works the same:

• 12.5% base rate if insurance replaces 50% of wages
• Increases by 0.25% for each percentage point above 50%
• Maximum 25%

Importantly:
The rate is determined by the policy’s replacement percentage — even if no employee takes leave during the year.

Example 1: Medical Practice with No Leave Taken

A Los Angeles medical practice (S-Corp) has 20 employees earning an average of $75,000.

They pay $7,500 annually for private paid family leave insurance that replaces 60% of wages.

No employees take leave in 2026.

60% wage replacement = 10 percentage points above 50%
Credit rate = 12.5% + (10 × 0.25%) = 15%

Credit =
$7,500 × 15% = $1,125 federal credit

Even though no leave was taken.

Example 2: Dental Practice with Leave Taken

In 2027, two employees take 12 weeks of leave and receive $22,155 in paid wages at 60% replacement.

The employer may elect to calculate the credit based on wages instead of premiums:

$22,155 × 15% = $3,323 credit

There is no requirement to use the same method each year.

This flexibility allows strategic planning.

No Double Benefit Rule

If you claim the credit based on insurance premiums:

• You must reduce your deductible premium expense by the amount of the credit claimed.

Proper bookkeeping coordination is critical.

Controlled Group Rules: Important for Multi-Entity Owners

OBBBA treats employers within the same controlled group (IRC §414(b) and (c)) as a single employer.

This affects:

• Doctors with multiple medical entities
• Dentists with management companies
• Entrepreneurs operating multiple S-Corps
• High-net-worth individuals with holding structures

If one entity fails to have a qualifying written policy, the group may lose eligibility.

There is a limited exception for “substantial and legitimate business reasons,” but:

The law specifically states this does NOT include:

• Separate lines of business
• Different wage categories
• State law differences

This is an area where structuring matters.

Expanded Employee Eligibility

OBBBA also made the credit more accessible:

✔ Employees only need 6 months of service (previously 1 year)
✔ Must work at least 20 hours per week
✔ Compensation must be below the “highly compensated employee” threshold (approximately $96,000 for 2025)

This expansion increases eligibility for:

• Growing Shopify companies
• Creative agencies
• Medical offices hiring new associates
• Production companies onboarding staff

Planning Considerations for Los Angeles Employers

This credit can be powerful — but only when coordinated properly.

For Doctors and Medical Practices:

Evaluate whether private insurance coverage combined with premium-based credit produces better results than wage-based calculation.

For Dental Practices:

Ensure all related entities maintain compliant written policies if operating under a management company structure.

For E-Commerce & Online Businesses:

If employees are remote across states, confirm that state-mandated leave is excluded from credit calculations.

For Creators & Production Companies:

If payroll fluctuates significantly year-to-year, consider switching between premium-based and wage-based methods depending on activity.

Interaction With California Law

This is a federal credit.

California has separate paid family leave requirements and generally does not offer a comparable income tax credit.

This creates another federal–state planning mismatch that must be analyzed.

Why Strategy Matters

This is not simply a payroll decision.

It intersects with:

• Entity structure
• Insurance design
• Compensation modeling
• Controlled group analysis
• Deduction coordination
• General business credit limitations

Without proper documentation and written policy language, the credit can be denied.

The Bottom Line

The Paid Family and Medical Leave Credit is now permanent and more flexible — but also more technical.

✔ Permanent extension
✔ Alternative insurance-based calculation
✔ Expanded employee eligibility
✔ Controlled group aggregation rules
✔ Strategic year-by-year election flexibility

For many Los Angeles business owners, this credit can offset a meaningful portion of benefit costs — but only with proper planning.

At Velin & Associates, Inc., we integrate tax credits into broader business strategy — not just compliance.

For more information about our tax planning services, contact us today: visit ourwebsite.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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