Employer Credit for Paid Family and Medical Leave (Form 8994)

form 8994
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40% of workers who apply for and take a family leave through the federal government’s FMLA say they took less time off than they really needed because the leave was unpaid.

You can take up to 12 weeks of job-protected leave under the federal Family and Medical Leave Act. The Act ensures that you can keep your job while caring for your family members or dealing with your own medical care.

Many companies and even states are now offering paid family and medical leave. The IRS uses Form 8994, which gives tax credits when a business provides those same FMLA leaves as paid. 

This allows the employee to take time off for family or medical needs. Their job and insurance are protected, and they continue to get paid. 

Read on to learn more about the business tax credit associated with paid family and medical leave and how you can apply as a business. 

Paid Family and Medical Leave

In 1993, the federal government passed the Family and Medical Leave Act. This law requires employers to allow employees to take up to 12 weeks off from work for a family or medical need. 

The law requires that employers protect the employee’s job while they are out on FMLA and continue to cover their insurance benefits. 

The law does not require employers to continue to pay the employees. 

Nine states and the District of Columbia now have state laws about paid family medical leave (PFML). Many businesses are opting to establish paid family medical leave policies for their employees. 

As a result of an established paid family medical leave policy, the business can apply for a tax credit when they file their annual taxes. 

Employer Credit for Paid Family Leave

To incentivize businesses to offer paid family leave, the IRS established the tax credit using Form 8994.

The business must have an established policy to apply for the tax credit. More on the requirements shortly. 

The Employer Credit for Paid Family and Medical Leave is a tax credit provided by Internal Revenue Code Section 45S for employers who offer paid family and medical leave to their employees.

The value of the credit depends on the percentage of wages provided by the employer during the leave. The minimum tax credit an employer can claim is 12.5%, but it can range up to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave per taxable year.

It’s important to note that employers of any size can claim this non-refundable paid leave tax credit, provided they have an active written policy offering the benefit. Businesses that voluntarily provide a paid family and medical leave benefit could be eligible for this tax credit.

In terms of taxability for employees, Paid Family Leave (PFL) benefits are considered a type of unemployment compensation and are taxable. They are reportable on federal return only.

Be sure to check with your tax specialist since there are some restrictions, especially if you took advantage of Covid relief tax breaks.

What Is Form 8994?

Form 8994 is the form a business would complete to apply for the paid family medical leave tax credit. 

The form gets filed with a business’s taxes to get the credit. The form asks the business to answer a series of questions. If they answer yes, they continue to the next question. 

If they answer no on the form, it directs them not to file Form 8994. The questions are as follows:


      • Does your business have a written policy that provides at least two weeks of paid family or medical leave? Are wages provided during this paid time off?

      • Does your policy pay at least 50% of the wages to a qualifying employee?

      • Did your business pay a qualifying employee during the past year?

      • If you have an employee not covered by FMLA, did you include language for the non-interference language?

    The form then asks that you report the wages paid during the tax year. You include paid family leave from partnerships and S corporations. The business would add these two lines and report this number on either Schedule K or Form 3800.

    How to Be an Eligible Employer

    An eligible employer must have a written policy as part of their company’s human resources package that provides paid family and medical leave. 

    There is minimum paid leave requirements that the policy must meet to be eligible.

    The policy must include non-interference language for any qualifying employees who aren’t covered by title I of the Family and Medical Leave Act (FMLA)

    Non-interference language must guarantee that the employer will not interfere with or deny any rights provided under the policy. The employer cannot discharge or discriminate against any individual for opposing any practice prohibited by the policy. 

    Which Employees Qualify for Paid Family and Medical Leave?

     To qualify for paid medical leave that the employer can use as a tax credit, the employee must also meet certain qualifying criteria. 

    The employee must have worked for the eligible employer for at least one year. 

    They also can’t make more than 60% of the amount applicable for that year under section 414. The applicable amount for 2021 and 2022 set by the IRS is $130,000.

    This means that in addition to being employed for at least one year, the employee also can’t make more than $78,000 a year.

    Applying for Employer Credits

    An employer who is eligible should apply using Form 8994 and 3800 when they complete their tax forms that are due on April 15th of every tax year. 

    The employer might also have filed an extension and have until October 15th to apply. 

    If your tax person or business manager has limited knowledge about tax credits, it makes sense to work with an employee retention credit filing service. You don’t want to miss out on any tax credits you should use when you file your taxes. 

    IRS Changes to Paid Family and Medical Leave

    The IRS has made a few changes to the paid family and medical leave rules. These are mostly related to tax credits a business could use from Covid Relief. 

    You may have claimed coronavirus-related employment credit on the business tax return, likely using Form 941. Certain wages that might have been claimed here are not also allowed to be used to calculate a credit on Form 8994.

    If there were wages paid after June 30th, 2021, and before January 1st, 2022, they cannot be used for both paid family and medical leave and a coronavirus-related employee retention credit.

    Use Form 8994 to Get the Tax Credits for Your Business

    In a tight job market, it might make sense to offer paid family and medical leave as part of a benefits package to secure the best employees. It also offers a nice tax credit if you offer such a perk for eligible employees. 

    If you need help with Form 8994 or have questions about other tax credits, we can help. Contact us today to learn more about what tax credits your business might qualify for.

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