What Is IRS Form 8994?

IRS Form 8994, Employer Credit for Paid Family and Medical Leave, helps eligible employers calculate a federal tax credit for providing qualifying paid family and medical leave to employees.

For small businesses, employee benefits are an important part of attracting and retaining workers. Employers may not realize that providing paid leave can also create a potential tax benefit when the business meets federal requirements.

The rules changed in 2025 when federal legislation made the paid family and medical leave credit permanent and expanded how eligible employers may calculate it. For tax years beginning in 2026, qualifying employers may generally choose between a calculation based on qualifying wages paid during leave or, when the requirements are met, certain insurance premiums paid for coverage of paid family and medical leave.

For business owners in Grand Rapids, Kentwood, Wyoming, Middleville, and throughout West Michigan, understanding Form 8994 can help with employee benefit planning and business tax preparation.

Which Businesses May Qualify for the Credit?

The credit is available to eligible employers that satisfy the requirements of Internal Revenue Code Section 45S. Eligibility depends on the employer’s written leave policy, the employees covered, and the method used to calculate the credit.

Businesses that may want to review the requirements include:

• Small and midsize businesses that provide paid family leave.
• Employers that pay workers during qualifying medical leave.
• Companies that maintain paid leave policies for eligible employees.
• Businesses that purchase qualifying insurance coverage for paid family and medical leave.
• Partnerships and S corporations that need to report eligible credits.

A business does not automatically qualify simply because it offers vacation, sick days, or general paid time off. The leave and written policy must satisfy the specific federal requirements.

Employers should also review how related businesses are treated under the tax rules because certain businesses may need to be considered together when determining eligibility.

What Counts as Qualifying Family and Medical Leave?

Qualifying leave generally covers specific circumstances recognized under federal tax rules, including:

• The birth of an employee’s child and caring for that child.
• Placement of a child with the employee for adoption or foster care.
• Caring for a spouse, child, or parent with a serious health condition.
• An employee’s own serious health condition that prevents the employee from performing job duties.
• Certain qualifying circumstances related to a family member’s covered military service.
• Caring for a qualifying service member with a serious injury or illness.

Ordinary vacation, personal days, and general sick leave do not automatically qualify. The leave must meet the applicable statutory requirements.

Employers should maintain a written policy that clearly identifies qualifying leave, eligibility requirements, payment levels, and the employees covered. Accurate records help support the credit calculation if the IRS requests documentation.

What Are the Main Requirements for Employers?

Under the established Form 8994 rules, an employer’s written policy generally must provide at least two weeks of annual paid family and medical leave to qualifying full-time employees, with a proportionate amount for qualifying part-time employees.

The traditional wage-based credit rules also require the policy to pay at least 50% of an employee’s normal wages during qualifying leave. Additional requirements apply to certain employees who are not covered by Title I of the Family and Medical Leave Act.

The definition of a qualifying employee has also changed. Under the amended law, employers may elect to include employees who have been employed for at least six months rather than one year. The law also adds a customary-hours requirement and changes how employee compensation is evaluated.

Because the rules were amended, employers should consult current IRS guidance before relying on older policy templates or prior-year calculations.

How Much Is the Paid Family and Medical Leave Credit?

Under the traditional wage-based method, the credit generally ranges from 12.5% to 25% of qualifying wages paid while eligible employees are on qualifying leave.

The applicable percentage depends on how much of the employee’s normal wages the employer pays. At the minimum qualifying payment rate of 50%, the credit percentage is generally 12.5%. The percentage increases as the leave payment rate rises, up to a maximum of 25%.

For example, suppose an eligible employer pays an employee $4,000 in qualifying wages during approved family or medical leave. If the employer’s applicable credit percentage is 20%, the potential credit would be $800, assuming all requirements and limitations are met.

This is an illustration, not a guarantee of a particular credit. The employer must verify qualifying wages, employee eligibility, applicable limits, and any restrictions involving other tax benefits.

For tax years beginning in 2026, the amended law also permits an eligible employer to elect a premium-based calculation when it maintains qualifying insurance coverage for paid family and medical leave. Under this method, qualifying insurance premiums may be used to calculate the credit according to the statutory rules. Employers cannot simply count any insurance premium; the policy and expenses must satisfy the requirements.

How Does Form 8994 Work?

The form helps employers determine the credit amount and report it through the appropriate federal tax return process.

The general steps include:

1. Review the written leave policy. Confirm that the policy satisfies the applicable federal requirements.
2. Identify qualifying employees. Check employee service, compensation, customary hours, and other eligibility rules.
3. Gather payroll or insurance records. Depending on the chosen method, collect qualifying wages paid during leave or eligible insurance premium information.
4. Calculate the potential credit. Apply the correct method, percentage, and applicable limitations.
5. Review other credits and deductions. Avoid counting the same wages or expenses improperly for multiple tax benefits.
6. Complete the appropriate filing. Use the applicable Form 8994 and report the credit through the required federal business tax return or related credit form.

Partnerships and S corporations generally use Form 8994 to claim the credit directly. Other taxpayers receiving the credit solely through a partnership or S corporation generally report it through Form 3800 rather than completing Form 8994 themselves.

Employers should check the latest IRS form and instructions because the 2025 legislation changed the credit and some older form materials may not yet reflect every new provision.

Common Mistakes to Avoid

Assuming all paid time off qualifies: Ordinary vacation and general sick leave may not meet the statutory definition of qualifying leave.

Failing to maintain a written policy: Employers should document leave provisions and confirm the policy meets the current requirements.

Using outdated employee eligibility rules: The amended law changes certain service-period and employee eligibility provisions.

Ignoring the new insurance premium method: Employers with qualifying insurance coverage may want to compare the available calculation methods.

Double-counting expenses: The tax rules restrict using certain wages or expenses to claim multiple tax benefits. Employers should also review applicable deduction adjustments.

How AIM Financial Can Help West Michigan Businesses

AIM Financial helps individuals and businesses prepare tax returns, understand filing requirements, and organize financial information for tax season.

For employers in Grand Rapids, Kentwood, Wyoming, Middleville, and across West Michigan, reviewing employee benefit programs before filing may help identify available tax credits and avoid preventable reporting errors.

If your company offers paid family or medical leave, maintains insurance for these benefits, or needs help understanding business tax credits, contact AIM Financial to discuss your tax preparation needs.

Contact AIM Financial for business tax preparation assistance and help reviewing the federal tax forms that may apply to your company. Planning ahead can help you organize payroll records, evaluate available tax benefits, and prepare a more accurate business tax return.

This article is for general educational purposes only and is not individualized tax or legal advice. Eligibility for the paid family and medical leave credit depends on the applicable tax year, written policy, employee qualifications, expenses, and current federal law. Consult current IRS guidance or a qualified tax professional before claiming the credit.