The article below reflects the important 2026 update: the paid family and medical leave credit is now permanent, and eligible employers may qualify under either a wage-based method or a new insurance-premium method. The IRS has also expanded eligibility rules, making this worth reviewing for small businesses as well as larger employers.

What Is IRS Form 8994?

Offering paid family and medical leave can help employers attract and retain employees, but it can also increase payroll expenses. Eligible businesses may be able to offset some of these costs through the federal Employer Credit for Paid Family and Medical Leave, calculated using IRS Form 8994.

This tax credit is intended to encourage employers to provide qualifying paid leave to employees who need time away from work for certain family or medical reasons. Depending on the employer’s circumstances and the rules for the tax year, the credit may be based on wages paid during leave or qualifying insurance premiums paid to provide leave benefits.

A major development for 2026 is that federal legislation made the credit permanent and expanded eligibility and coverage. Employers should review the updated requirements rather than relying exclusively on older Form 8994 instructions. The IRS has published additional 2026 guidance addressing the changes.

What Is the Purpose of the Paid Family and Medical Leave Credit?

The credit helps eligible employers recover a portion of qualifying costs associated with providing paid family and medical leave.

Qualifying reasons for leave may include:

• The birth of a child and caring for the newborn.
• Adoption or foster-care placement.
• 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 military-related exigencies.
• Caring for a covered service member with a serious injury or illness.

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

For employers, understanding the distinction between ordinary paid time off and qualifying family and medical leave is important before claiming the credit.

Who Can Claim the Credit?

Eligible employers may include small businesses, corporations, partnerships, and other qualifying employers that provide paid family and medical leave under the applicable rules.

For 2026, the expanded rules allow eligible employers to consider employees with at least six months of service and qualifying part-time employees who customarily work at least 20 hours per week, subject to the detailed requirements.

Employers should review their employee records and written leave policies to determine which employees qualify.

A company does not automatically qualify simply because it offers paid leave. It must satisfy the applicable statutory requirements and maintain records supporting the credit.

The IRS’s older Form 8994 instructions describe the prior eligibility framework, including a written policy and minimum paid leave requirements. Because the law changed for 2026, businesses should also consult current IRS guidance and the final instructions applicable to their tax year.

How Much Is the Tax Credit Worth?

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

The applicable percentage depends on the qualifying leave payment rate and the rules for the relevant tax year. Under the traditional calculation, a 50% wage replacement rate produces a 12.5% credit percentage, with the percentage increasing as the leave payment rate rises, up to 25%.

For example, suppose an employer pays $20,000 in qualifying wages for eligible family and medical leave and qualifies for a 20% credit rate. The potential credit would be:

$20,000 × 20% = $4,000.

This is an illustration only. Actual eligibility, the credit calculation, and any applicable limitations must be determined using the current rules.

For 2026, eligible employers may also be able to use a premium-based method for qualifying insurance premiums paid to provide paid family and medical leave. The employer must follow the applicable election, allocation, and calculation rules and should not assume that the wage-based and premium-based methods can simply be combined for the same costs.

What Changed for Employers in 2026?

The Working Families Tax Cuts made significant changes to the federal paid family and medical leave credit.

1. The credit is permanent.

The credit is no longer limited to the previous extension period ending with tax years beginning in 2025.

2. More employees may qualify.

The revised rules expand eligibility, including certain employees with six months of service and qualifying part-time employees who customarily work at least 20 hours per week.

3. Insurance premiums may qualify.

Beginning in 2026, eligible employers may be able to calculate the credit using qualifying insurance premiums paid for policies providing family and medical leave benefits, subject to the applicable requirements.

4. State and local leave requirements receive different treatment.

The updated rules allow certain leave provided under state or local mandates to count toward eligibility requirements. However, those mandated benefits generally cannot be included in the federal credit calculation.

Employers should carefully distinguish between meeting the eligibility rules and calculating the amount of the credit. These are separate steps.

The IRS issued Notice 2026-28 to provide guidance on the expanded credit, including the relationship between the wage-based and premium-based methods.

How Do You Complete IRS Form 8994?

The exact process depends on the tax year, employer type, and method used to calculate the credit.

Step 1: Review the employer’s leave policy

Confirm that the employer has a qualifying paid family and medical leave arrangement. Review the written policy, employee eligibility, qualifying leave reasons, and applicable payment requirements.

For 2026, review the updated law and guidance rather than relying solely on older requirements.

Step 2: Identify qualifying employees and costs

Gather payroll records, leave dates, wages paid during qualifying leave, insurance premium records if applicable, and employee service information.

Keep separate records for qualifying and nonqualifying expenses.

Step 3: Choose and calculate the applicable method

Determine whether the employer will use the wage-based method or, if eligible, the premium-based method.

Follow the applicable rules for calculating the credit and allocating costs. Do not count the same expense twice.

Step 4: Complete the applicable tax forms

Form 8994 is the form associated with the employer credit. Partnerships and S corporations have specific reporting requirements, while other taxpayers may report certain pass-through credits directly on Form 3800, General Business Credit.

Because the IRS has released a draft 2026 Form 8994 and updated guidance, employers should verify the final form and instructions for their filing year before completing the return.

Step 5: Coordinate the credit with business deductions

Claiming a tax credit may affect the wage or other expense deduction associated with the same costs. Under the traditional rules, employers generally reduce their wage deduction by the credit amount. The updated rules and selected credit method should be reviewed before finalizing the tax return.

Step 6: Retain supporting documentation

Keep the written leave policy, payroll information, premium records, calculations, and supporting employee information. Good documentation can help substantiate the credit if the return is reviewed.

Common Mistakes Employers Should Avoid

Businesses can miss tax benefits or make inaccurate claims when they:

• Assume every paid absence qualifies.
• Use outdated Form 8994 instructions for a 2026 tax year.
• Overlook the expanded employee eligibility rules.
• Include state-mandated payments in the credit calculation when they are not eligible.
• Claim the same expenses under multiple methods.
• Fail to reduce deductions when required.
• Neglect to maintain supporting payroll and policy records.

Reviewing the rules before the end of the tax year can make it easier to organize the records needed to support a claim.

How AIM Financial Can Help Your Business

Tax credits can provide meaningful savings, but the rules and paperwork may be confusing for business owners who are already managing payroll, employees, and daily operations.

AIM Financial helps taxpayers organize financial information and address their tax preparation needs. If your business is located in Grand Rapids, Kentwood, Wyoming, or elsewhere in West Michigan, contact AIM Financial to discuss your business tax preparation questions and the records you may need for filing.

Whether you run a small company or a growing business with multiple employees, reviewing available tax credits can be a useful part of your annual tax planning process.

Contact AIM Financial for business tax preparation assistance and help organizing the information needed to prepare your federal tax return.

Disclaimer: This article is for general educational purposes and is not individualized tax or legal advice. Eligibility for the paid family and medical leave credit depends on the employer, employee circumstances, leave policy, tax year, and applicable law. Consult current IRS guidance and the final Form 8994 instructions before claiming the credit.