The IRC §45S Paid Family and Medical Leave Credit After OBBBA: A Permanent Credit for Freelancers With One Employee (2026)

Published: September 21, 2026 · Reading time: 13 min

TL;DR: The §45S employer credit for paid family and medical leave was written to die after 2025 — subsection (i) said so in one sentence — and Pub. L. 119-21 §70304(a)(5) struck that sentence. 2026 is the first year of the permanent version, which also adds a credit on insurance premiums, a 6-month employment election, a new 20-hour-per-week test, and a changed rule for state-mandated leave. The credit is a sliding 12.5% to 25% of leave wages, keyed to how generous your policy is, capped at 12 weeks per employee per year. A freelancer paying one employee 12 weeks at 60% of a $32.00 hourly rate pays $9,216.00 of leave wages and earns a 15.0% credit of $1,382.40 — but §280C(a) claws back the wage deduction, so the real benefit is $960.96, about 69 cents per credit dollar. The qualifying-employee pay ceiling for 2026 is $96,000 of 2025 compensation. And the credit offsets income tax only — never self-employment tax.

Most freelancer tax writing about hiring a first employee stops at payroll mechanics and the retirement plan startup credit. The §45S paid family and medical leave credit rarely gets more than a table row, and for eight years that was defensible: it was a temporary provision, renewed in one- and five-year increments, and nobody wanted to build a policy around something that might not exist next December. That changed on July 4, 2025. This post fills the gap the corpus has carried since — no worked §45S computation anywhere on this site, and nothing at all on what the 2025 amendments did — by running the credit end to end for the business that actually has to decide about it: a sole proprietor with one W-2 employee.

What Changed on July 4, 2025 — and Why 2026 Is the First Year It Matters

The amendment notes to 26 U.S.C. §45S record six distinct changes, all from Pub. L. 119-21, title VII, §70304(a). The effective-date note is a single sentence: "The amendments made by this section [amending this section and section 280C of this title] shall apply to taxable years beginning after December 31, 2025."

Two of those quietly reverse published IRS guidance. Notice 2018-71 — still the only substantive guidance on §45S — says flatly that "Any leave paid by a State or local government or required by State or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer." The amended §45S(c)(4)(A) now says the opposite for the first half of that sentence: such leave "shall be taken into account in determining the amount of paid family and medical leave provided by the employer," while subparagraph (B) keeps it out of the credit computation. And Q&A-14 of the same notice answered "No" to whether an employee must work a minimum number of hours — a statement the new §45S(d)(3) 20-hour test directly contradicts for 2026.

Read Notice 2018-71 for the mechanics it still governs, and check each of its answers against the amended statute before relying on it.

You Do Not Have to Be Covered by the FMLA

The most common reason a freelancer skips this credit is the assumption that a credit named after the Family and Medical Leave Act requires FMLA coverage — and the FMLA, per §101(4) of that Act, reaches only an employer who "employs 50 or more employees for each working day during each of 20 or more calendar workweeks in the current or preceding calendar year." That assumption is wrong, and the IRS said so in the first question it published on the subject.

"Question 1: Must an employer be subject to title I of the FMLA to be an eligible employer under section 45S?

Answer 1: No. Any employer will be an eligible employer under section 45S if it has a written policy in place that provides paid family and medical leave, as described in Section B of this notice, satisfies the minimum paid leave requirements set forth in Section C of this notice, and, if applicable, includes the 'non-interference' language described in Q&A-3." — Notice 2018-71

The "if applicable" is not optional for a small business — it is guaranteed to apply. §45S(c)(2) defines an "added employee" as a qualifying employee not covered by title I of the FMLA, and an "added employer" as an eligible employer who offers paid leave to added employees. An added employer is not an eligible employer unless its written policy "ensures that the employer— (i) will not interfere with, restrain, or deny the exercise of or the attempt to exercise, any right provided under the policy, and (ii) will not discharge or in any other manner discriminate against any individual for opposing any practice prohibited by the policy."

Notice 2018-71 supplies a model clause that satisfies it:

"[Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy."

Form 8994's Question D asks about exactly this — "If you employed at least one qualifying employee who was not covered by the Family and Medical Leave Act, did you include in your written policy and otherwise comply with 'non-interference' language?" — and answering No stops the form.

Who Counts as a Qualifying Employee in 2026

Three tests, all in §45S(d), all mandatory. The statute reads:

"the term 'qualifying employee' means any employee (as defined in section 3(e) of the Fair Labor Standards Act of 1938, as amended) who— (1) has been employed by the employer for 1 year or more (or, at the election of the employer, for not less than 6 months), and (2) for the preceding year, had compensation, as determined on an annualized basis (pro-rata for part-time employees), not in excess of an amount equal to 60 percent of the amount applicable for such year under clause (i) of section 414(q)(1)(B), and (3) is customarily employed for not less than 20 hours per week."

The compensation test is the one that needs a number, and it is a number you have to look up twice — once for the year and once for the preceding year the statute actually points at. §414(q)(1)(B)(i) is the highly-compensated-employee compensation threshold, a statutory $80,000 that the Secretary indexes. Notice 2024-80 set it at $160,000 for 2025 ("The threshold used in the definition of 'highly compensated employee' under section 414(q)(1)(B) is increased from $155,000 to $160,000"), and Notice 2025-67 held it there for 2026 ("...remains $160,000").

So for a credit claimed on a 2026 tax year, the preceding year is 2025 and the ceiling is 60% × $160,000 = $96,000 of annualized 2025 compensation. Because the 2026 figure is unchanged, a 2027 credit will use the same $96,000 — but that is a coincidence of two years' indexing, not a rule, and it needs re-checking against the notice for each year.

The 6-month election is the genuinely useful new lever for a freelancer: a person hired in August 2025 fails the old 1-year test for leave taken in March 2026 and passes the elected 6-month version. The 20-hour test cuts the other way — a genuinely part-time assistant at 15 hours a week is now out, even though §45S(c)(1)(A)(ii) still contemplates prorated leave for part-time employees who clear it.

The Credit Rate Slides With Your Policy

§45S(a)(2) defines the rate in one sentence:

"the term 'applicable percentage' means 12.5 percent increased (but not above 25 percent) by 0.25 percentage points for each percentage point by which the rate of payment (as described under subsection (c)(1)(B)) exceeds 50 percent."

The "rate of payment" is the figure in your own policy, and §45S(c)(1)(B) requires it to be "not less than 50 percent of the wages normally paid to such employee for services performed for the employer." So the schedule runs from 12.5% at the 50% statutory floor to 25% at a 100%-of-wages policy, in quarter-point steps.

Two ceilings sit on top of it. §45S(b)(1) limits the wages taken into account to "the product of the normal hourly wage rate of such employee... and the number of hours (or fraction thereof) for which family and medical leave is taken" — so paying an inflated rate during leave does not inflate the credit base. And §45S(b)(3): "The amount of family and medical leave that may be taken into account with respect to any employee under subsection (a) for any taxable year shall not exceed 12 weeks."

One more gate that trips small employers: the leave has to be family and medical leave. §45S(e)(2) excludes paid leave provided "as vacation leave, personal leave, or medical or sick leave (other than leave specifically for 1 or more of the purposes referred to in paragraph (1))." Notice 2018-71, Q&A-9, applies that strictly — leave counts "only if the leave is specifically designated for one or more FMLA purposes, may not be used for any other reason..." A single pooled PTO bank, which is how most one-employee businesses handle time off, produces no credit at all.

Worked Example: One Employee, 12 Weeks, 60%

Dana runs a two-person web-design studio as a sole proprietor. She files single, claims no dependents, and has no income other than the business. Her one employee, Priya, was hired in February 2024, is paid $32.00 an hour for a 40-hour week, and earned $66,560 in 2025 — under the $96,000 ceiling, over the 1-year mark, and well over 20 hours a week, so she clears all three §45S(d) tests.

Effective January 1, 2026, Dana adopts a written policy providing 12 weeks of annual paid family and medical leave at 60% of normal wages, including the non-interference clause. In May 2026 Priya takes the full 12 weeks after the birth of a child — an FMLA purpose under §102(a)(1)(A) of the Act.

Before any leave costs, the studio's Schedule C would net $128,000. The example holds every other 2026 variable constant — no retirement-plan contribution, no self-employed health insurance deduction, no other income — so that the only thing moving between the two columns below is the §280C(a) adjustment. Dana is comparing two choices that are genuinely open to her, because §45S(h) lets a taxpayer elect to have this section not apply for any year: claim the credit and lose the deduction, or elect out and keep the deduction whole.

node -e "
// 2026 single-filer rate table, Rev. Proc. 2025-32 §4.01 Table 3; standard deduction \$16,100 (§4.14)
const cuts=[[12400,.10,0],[50400,.12,1240],[105700,.22,5800],[201775,.24,17966],
            [256225,.32,41024],[640600,.35,58448],[Infinity,.37,192979.25]];
const base=[0,12400,50400,105700,201775,256225,640600];
const incomeTax=ti=>{for(let i=0;i<cuts.length;i++) if(ti<=cuts[i][0]) return cuts[i][2]+cuts[i][1]*(ti-base[i]);};
function model(profit){
  const seTax=profit*0.9235*0.153;              // net earnings below the \$184,500 2026 wage base
  const halfSE=seTax/2;
  const tiBeforeQbi=profit-halfSE-16100;        // §199A(e)(1): before the QBI deduction itself
  const tentative=0.20*(profit-halfSE);         // QBI = profit less the deductible half of SE tax
  const tiCap=0.20*tiBeforeQbi;                 // §199A(a) 20%-of-taxable-income cap, no capital gain
  const qbiDed=Math.min(tentative,tiCap);       // SSTB and W-2-wage limits inapplicable below \$201,750
  const ti=tiBeforeQbi-qbiDed;
  return {seTax,tentative,tiCap,qbiDed,ti,inc:incomeTax(ti)};
}
const f=n=>n.toLocaleString('en-US',{minimumFractionDigits:2,maximumFractionDigits:2});

const HOURLY=32.00, HOURS=12*40, RATE=0.60, BASE_PROFIT=128000;
const leaveWages=HOURS*HOURLY*RATE;
const erFica=leaveWages*0.0765;
const applic=0.125+0.0025*((RATE-0.50)*100);   // §45S(a)(2), capped at 25% -- not reached at 60%
const credit=applic*leaveWages;
const pOut=BASE_PROFIT-leaveWages-erFica;       // elects out under §45S(h): full wage deduction
const pIn=pOut+credit;                          // claims it: §280C(a) adds the credit back
const A=model(pOut), B=model(pIn);
const cost280C=(B.inc+B.seTax)-(A.inc+A.seTax);

console.log('leave wages  480 hrs x \$32.00 x 60%       ', f(leaveWages));
console.log('  §45S(b)(1) ceiling  480 hrs x \$32.00    ', f(HOURS*HOURLY));
console.log('employer FICA on the leave wages, 7.65%   ', f(erFica));
console.log('applicable percentage  12.5 + 0.25 x 10   ', (applic*100).toFixed(2)+'%');
console.log('§45S CREDIT                               ', f(credit));
console.log('');
console.log('                                   ELECT OUT      CLAIM IT');
console.log('Schedule C net profit           ', f(pOut).padStart(12), f(pIn).padStart(13));
console.log('self-employment tax             ', f(A.seTax).padStart(12), f(B.seTax).padStart(13));
console.log('QBI: 20% of QBI                 ', f(A.tentative).padStart(12), f(B.tentative).padStart(13));
console.log('QBI: 20%-of-taxable-income cap  ', f(A.tiCap).padStart(12), f(B.tiCap).padStart(13));
console.log('QBI deduction (lesser of the 2) ', f(A.qbiDed).padStart(12), f(B.qbiDed).padStart(13));
console.log('taxable income                  ', f(A.ti).padStart(12), f(B.ti).padStart(13));
console.log('income tax                      ', f(A.inc).padStart(12), f(B.inc).padStart(13));
console.log('less §45S credit                ', f(0).padStart(12), f(credit).padStart(13));
console.log('TOTAL income tax + SE tax       ', f(A.inc+A.seTax).padStart(12), f(B.inc+B.seTax-credit).padStart(13));
console.log('');
console.log('§38(c)(1) limit -- net regular tax        ', f(B.inc), '(under \$25,000, so no 25% cutback)');
console.log('tax cost of the §280C(a) add-back         ', f(cost280C));
console.log('NET BENEFIT of claiming the credit        ', f(credit-cost280C));
console.log('effective rate on the add-back            ', (cost280C/credit*100).toFixed(2)+'%');
"

Output:

leave wages  480 hrs x $32.00 x 60%        9,216.00
  §45S(b)(1) ceiling  480 hrs x $32.00     15,360.00
employer FICA on the leave wages, 7.65%    705.02
applicable percentage  12.5 + 0.25 x 10    15.00%
§45S CREDIT                                1,382.40

                                   ELECT OUT      CLAIM IT
Schedule C net profit              118,078.98    119,461.38
self-employment tax                 16,684.03     16,879.35
QBI: 20% of QBI                     21,947.39     22,204.34
QBI: 20%-of-taxable-income cap      18,727.39     18,984.34
QBI deduction (lesser of the 2)     18,727.39     18,984.34
taxable income                      74,909.57     75,937.36
income tax                          11,192.11     11,418.22
less §45S credit                         0.00      1,382.40
TOTAL income tax + SE tax           27,876.13     26,915.17

§38(c)(1) limit -- net regular tax         11,418.22 (under $25,000, so no 25% cutback)
tax cost of the §280C(a) add-back          421.44
NET BENEFIT of claiming the credit         960.96
effective rate on the add-back             30.49%

Why the credit is worth 69 cents on the dollar

§280C(a) is the whole story: "No deduction shall be allowed for that portion of the wages or salaries paid or incurred for the taxable year which is equal to the sum of the credits determined for the taxable year under sections 45A(a), 45P(a), 45S(a)(1)(A), 51(a), and 1396(a)." Dana still pays Priya $9,216.00 and still reports it in full on Priya's Form W-2 — only Dana's Schedule C Line 26 wage deduction shrinks by $1,382.40.

A shrinking Schedule C deduction is expensive in three places at once, which is why the effective rate on the add-back is 30.49% rather than her 22% bracket. The extra $1,382.40 of net profit raises self-employment tax by $195.32, raises income tax, and — because QBI tracks net profit — only partly offsets itself through §199A. That last point is worth pausing on: in both columns, the QBI deduction is the 20%-of-taxable-income cap ($18,727.39 and $18,984.34), not 20% of QBI ($21,947.39 and $22,204.34). The cap binds here because a Schedule C profit around $118,000, less half of self-employment tax and a $16,100 standard deduction, leaves taxable income well below QBI itself. The SSTB phase-out and the W-2-wage / 2.5%-of-property limit never come into play, because taxable income is nowhere near the 2026 threshold of $201,750 for a single filer (Rev. Proc. 2025-32 §4.26) — but checking one §199A limit is not checking the others, and the one that binds here is the one people skip.

One more structural limit, and it is the difference between a credit and a business deduction: §45S is a nonrefundable general business credit, so it reduces income tax only. Dana's $16,879.35 of self-employment tax is untouched by it. §38(c)(1) caps the general business credit at net income tax over the greater of tentative minimum tax or "25 percent of so much of the taxpayer's net regular tax liability as exceeds $25,000" — her net regular tax is $11,418.22, below $25,000, so the 25% cutback is zero and the whole credit is usable this year. Had her income tax been smaller than the credit, §39(a)(1) would have carried the excess back 1 year and forward 20.

What Each Rate of Payment Actually Costs

The sliding scale creates a real decision. A more generous policy costs more in absolute dollars, but recovers a larger fraction of every dollar. Running Dana's facts across the full statutory range — same employee, same 12 weeks, same $128,000 of pre-leave profit, with employer FICA and the §280C add-back included at each point:

node -e "
const cuts=[[12400,.10,0],[50400,.12,1240],[105700,.22,5800],[201775,.24,17966],
            [256225,.32,41024],[640600,.35,58448],[Infinity,.37,192979.25]];
const flo=[0,12400,50400,105700,201775,256225,640600];
const itax=ti=>{for(let i=0;i<cuts.length;i++) if(ti<=cuts[i][0]) return cuts[i][2]+cuts[i][1]*(ti-flo[i]);};
function tax(profit){const se=profit*0.9235*0.153, tiPre=profit-se/2-16100;
  return itax(tiPre-Math.min(0.20*(profit-se/2),0.20*tiPre))+se;}
const f=n=>n.toLocaleString('en-US',{minimumFractionDigits:2,maximumFractionDigits:2});
const applicable=r=>Math.min(0.25, 0.125+0.0025*((r-0.50)*100));

const HOURLY=32.00, HOURS=480, BASE=128000;
const taxNoPolicy=tax(BASE);
console.log('baseline: no paid-leave policy at all -- profit', f(BASE), 'tax', f(taxNoPolicy));
console.log('rate | applic | leave wages | er FICA  |  credit  |  net cost  | cost per \$1');
for (const pct of [50,60,70,80,90,100]) {
  const r=pct/100, w=HOURS*HOURLY*r, fica=w*0.0765, a=applicable(r), c=a*w;
  const taxWith=tax(BASE-w-fica+c)-c;
  const net=w+fica+(taxWith-taxNoPolicy);
  console.log(String(pct).padStart(3)+'% | '+(a*100).toFixed(2).padStart(5)+'% | '+f(w).padStart(11)+
    ' | '+f(fica).padStart(8)+' | '+f(c).padStart(8)+' | '+f(net).padStart(10)+' | '+
    (net/w).toFixed(4).padStart(11));
}
console.log('');
const prem=2400, policyRate=0.70, ap=applicable(policyRate), pc=ap*prem;
const cost=tax(BASE-prem+pc)-tax(BASE-prem);
console.log('premium election, §45S(a)(1)(B): premiums', f(prem), 'on a', (policyRate*100)+'% policy');
console.log('  applicable percentage', (ap*100).toFixed(2)+'%', '-> credit', f(pc));
console.log('  §280C(a) premium add-back costs', f(cost), '-> net', f(pc-cost));
"

Output:

baseline: no paid-leave policy at all -- profit 128,000.00 tax 30,900.67
rate | applic | leave wages | er FICA  |  credit  |  net cost  | cost per $1
 50% | 12.50% |    7,680.00 |   587.52 |   960.00 |   5,079.74 |      0.6614
 60% | 15.00% |    9,216.00 |   705.02 | 1,382.40 |   5,935.53 |      0.6440
 70% | 17.50% |   10,752.00 |   822.53 | 1,881.60 |   6,737.93 |      0.6267
 80% | 20.00% |   12,288.00 |   940.03 | 2,457.60 |   7,486.94 |      0.6093
 90% | 22.50% |   13,824.00 | 1,057.54 | 3,110.40 |   8,182.57 |      0.5919
100% | 25.00% |   15,360.00 | 1,175.04 | 3,840.00 |   8,824.81 |      0.5745

premium election, §45S(a)(1)(B): premiums 2,400.00 on a 70% policy
  applicable percentage 17.50% -> credit 420.00
  §280C(a) premium add-back costs 128.04 -> net 291.96

The 60% row is the worked example above — $9,216.00 of leave wages and a $1,382.40 credit, which is the cross-check that the two computations describe the same facts. Reading down the last column: every extra point of generosity makes the leave slightly cheaper per dollar of wage, from 66.14 cents at the statutory 50% floor to 57.45 cents at a full-pay policy. Reading down the "net cost" column tells the opposite story — the absolute bill rises from $5,079.74 to $8,824.81. The credit never makes paid leave free; even at a full-pay policy, the credit and the deductions together — net of the employer FICA the leave wages themselves generate, which is already inside that last column — offset only about 42.6 cents of each dollar of leave wage (1 − 0.5745). Anyone who tells a one-employee business that §45S "pays for" parental leave is reading the headline rate and not the statute.

The New Insurance-Premium Election

The most consequential 2025 amendment for a very small business is the one that lets the credit attach to premiums rather than wages. §45S(a)(1)(B) makes the credit, at the employer's election, the applicable percentage of

"the total amount of premiums paid or incurred by such employer during such taxable year with respect to such insurance policy"

where the employer "has an insurance policy with regards to the provision of paid family and medical leave which is in force during the taxable year." And §45S(a)(3) settles what the applicable percentage is built from when nobody actually takes leave: "the rate of payment under the insurance policy shall be determined without regard to whether any qualifying employees were on family and medical leave during the taxable year."

That last paragraph only does work if the premium credit can be claimed in a year with no leave taken — otherwise there would be nothing to determine. On $2,400 of annual premiums for a policy paying 70% of wages, the applicable percentage is 17.50% and the credit is $420.00; after the §280C(a) premium add-back (the second sentence of §280C(a) handles premiums separately from wages), the net is $291.96. Small, but it is a return on an insurance premium a business might buy anyway, and it converts an all-or-nothing benefit into a predictable annual one.

Two honest caveats. First, the eligible-employer requirements in §45S(c) are unchanged — you still need the written policy, the 2-week minimum, the 50% rate floor and the non-interference language, whether you self-fund or insure. Second, the form has not caught up. The current Form 8994 is the January 2021 revision; its Question C asks "Did you pay family and medical leave to at least one qualifying employee during the tax year?" and answering No stops the form, and its line 1 is keyed entirely to "wages paid during your tax year to your qualifying employee(s) while on family and medical leave." Neither contemplates a premiums-only claim. Check the current-year revision of Form 8994 and its instructions before filing on this basis, and take advice on it.

Three Traps Worth Naming

The policy has to exist first

Notice 2018-71, Q&A-5, is unambiguous: the written policy "must be in place before the paid family and medical leave for which the employer claims the credit is taken," and is in place "on the later of the policy's adoption date or the policy's effective date." An employee's leave in March and a policy adopted in December produce no credit for that leave. This is the single most common way a small employer loses the credit — not ineligibility, just sequence.

State-mandated leave changed sides for 2026

Under the amended §45S(c)(4), leave paid by or required by a state or local government now "shall be taken into account in determining the amount of paid family and medical leave provided by the employer" — so it counts toward your 2-week minimum — but "shall not be taken into account in determining the amount of the paid family and medical leave credit." If your state runs a paid family leave insurance program, the wages it replaces cannot generate a credit for you no matter how the policy is drafted, and any employer top-up above the state benefit is what is left to work with. Notice 2018-71's blanket statement that such leave is disregarded "for any purpose" no longer matches the statute.

Your spouse and your own children are the wrong employees for this

Employing a spouse is a real and well-established strategy, but it does not combine with this credit in a sole proprietorship. §45S(g) borrows the FUTA definition of wages — "the term 'wages' has the meaning given such term by subsection (b) of section 3306 (determined without regard to any dollar limitation contained in such section)" — and §3306(b) defines wages as "all remuneration for employment." §3306(c)(5) then removes from "employment" the "service performed by an individual in the employ of his son, daughter, or spouse, and service performed by a child under the age of 21 in the employ of his father or mother." Remuneration for a service that is not "employment" is not FUTA wages, and so is not §45S wages.

Note the age: the FUTA family exclusion runs to 21, not the 18 of the §3121(b)(3)(A) FICA carve-out that most freelancer tax writing cites when discussing paying your children. They are different provisions with different ages and different consequences. The IRS has published nothing on this specific interaction under §45S, so treat it as a question for your CPA rather than a settled answer — but do not plan around a credit for paying your own spouse's leave without asking it.

Common Mistakes

1. Assuming the credit expired. The sunset in §45S(i) was real and was scheduled to bite after 2025 — and §70304(a)(5) of Pub. L. 119-21 struck it. A 2026 return that skips §45S because "that credit ended" is leaving a live provision on the table.
2. Writing the policy after the leave. Notice 2018-71 Q&A-5 requires the policy to be in place before the leave is taken. There is no retroactive adoption for a year already under way, outside the long-expired 2018 transition rule.
3. Running paid leave through a single PTO bank. §45S(e)(2) excludes vacation, personal and sick leave, and Q&A-9 requires the leave to be specifically designated for an FMLA purpose and unusable for anything else. A pooled bank of "time off" earns nothing.
4. Forgetting the §280C(a) add-back. Claiming the credit and deducting the full wage is a double benefit the statute denies. In the example, forgetting it overstates the credit's value by $421.44 — 30% of it.
5. Expecting the credit to reduce self-employment tax. It is a nonrefundable general business credit; it offsets income tax only. A freelancer whose income tax is already zeroed out by other deductions gets nothing from it in that year, though §39(a)(1) carries it forward 20 years.
6. Applying the 2025 qualifying-employee rules in 2026. The 20-hour-per-week test in §45S(d)(3) is new, and Notice 2018-71's Q&A-14 statement that there is no minimum-hours requirement no longer describes the amended statute. An employee who qualified last year may not qualify this year.
7. Using the wrong year's compensation figure. §45S(d)(2) tests compensation for the preceding year against 60% of that year's §414(q)(1)(B)(i) amount. For a 2026 credit that is 60% of the 2025 figure — $96,000 — not 60% of whatever the 2026 figure turns out to be.

How CentSense Helps

CentSense is expense and mileage tracking, not payroll — but the §45S decision runs on numbers that live on the expense side of the business, and those are the ones freelancers reconstruct badly at filing time:

• Wages and employer payroll taxes tracked as their own categories, so the Line 26 figure you reduce by the credit is a number you can point at rather than a plug
• AI receipt scanning captures the payroll-service invoices, insurance premium notices and benefit-administration fees that accumulate the moment a first employee exists
• Cloudinary-backed receipt storage keeps the premium notices for a paid-leave policy filed with the year they belong to, which is what an §45S(a)(1)(B) premiums claim has to substantiate
• CSV export hands your CPA a clean year of wage, payroll-tax and benefit spending at the same time you hand them the leave-hours log
• Business-use and mileage tracking stay separate from payroll, so an employee's reimbursed driving never contaminates the wage base the credit is computed on

If you are still deciding whether to bring on that first employee at all, the W-2 employee vs. 1099 contractor comparison covers the threshold question, and the retirement plan startup credit covers the other federal credit that opens up on the same day.

Authoritative References

• 26 U.S.C. §45S — Employer credit for paid family and medical leave (Cornell Law School Legal Information Institute)
• 26 U.S.C. §280C — Certain expenses for which credits are allowable (Cornell LII)
• 26 U.S.C. §38 — General business credit (Cornell LII)
• 26 U.S.C. §39 — Carryback and carryforward of unused credits (Cornell LII)
• 26 U.S.C. §3306 — Definitions (FUTA wages and employment) (Cornell LII)
• 26 U.S.C. §414(q) — Highly compensated employee (Cornell LII)
• 29 U.S.C. §2612 — FMLA §102, leave requirement (Cornell LII)
• IRS — Notice 2018-71, Internal Revenue Bulletin 2018-41 (paid family and medical leave credit Q&As)
• IRS — Notice 2024-80, Internal Revenue Bulletin 2024-47 (2025 retirement plan limitations, §414(q)(1)(B) threshold)
• IRS — Notice 2025-67, Internal Revenue Bulletin 2025-49 (2026 retirement plan limitations, §414(q)(1)(B) threshold)
• IRS — Form 8994, Employer Credit for Paid Family and Medical Leave (Rev. January 2021)
• IRS — Form 3800, General Business Credit (2025)
• Internal Revenue Bulletin 2025-45 — Rev. Proc. 2025-32 (2026 inflation adjustments: rate tables, standard deduction, §199A thresholds)
• Social Security Administration — Cost-of-Living Increase and Other Determinations for 2026, 90 FR (2026 OASDI contribution and benefit base, $184,500)

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This guide is general education for U.S. self-employed freelancers filing a Schedule C in 2026. It is not personalized tax advice — your facts determine the right treatment, and a payroll-based credit with a written-policy requirement should be set up and claimed with a CPA or EA involved. Statutory text quoted here reflects 26 U.S.C. §45S and §280C as amended by Pub. L. 119-21, §70304; Notice 2018-71 predates that amendment and several of its answers no longer describe the current statute. Form 8994's most recent revision as of this writing is January 2021 and likewise predates the amendment — check the current-year form and instructions before filing.