Form 8994: Who’s eligible, and how much can you save?

Paid family and medical leave is a great benefit to offer your team, enabling you to attract and retain top talent in the US. And, if you submit IRS Form 8994, you can potentially reduce your tax bill, too.

But how do you know if your business is eligible? How much can you save? And how do you claim your credit?

In this article, we’ll answer all these questions, and explain everything you need to know about Form 8994. So let’s jump straight in.

What is Form 8994?

Form 8994 — the Employer Credit for Paid Family and Medical Leave — enables eligible US-based employers to obtain a tax credit for providing paid time off to their employees.

Specifically, the form helps you work out how much of a business tax credit you can claim for the support you’re giving your employees.

Who is eligible to file Form 8994?

Any business — small, medium, or large — is eligible. As long as you provide qualifying paid family and medical leave to your employees, you can file Form 8994.

How do businesses qualify?

That said, there are a few requirements that your business must meet to file Form 8994:

1. Your business must provide at least two weeks of paid leave for full-time employees (pro-rated for part-time employees) per year.

2. Payment during leave should be at least 50% of what your employees usually earn.

3. Your leave policies need to qualify under the federal Family and Medical Leave Act (FMLA). Note that, if they don’t, you can voluntarily provide paid leave that matches the act’s standards to all employees, allowing you to still claim the business credit.

4. You must have a written policy in place that clearly lays out all these benefits.

5. Your policy should include a promise that qualifying employees who aren’t covered by Title I of the FMLA won’t face any negative consequences for taking their leave. This is called non-interference language.

6. Your policy must not discriminate. For example, it can’t favor senior employees, those who work more hours, or those who’ve been at your company for longer. It must provide the same benefits to all qualifying employees.

Which employees are eligible to file Form 8994?

You can’t file Form 8994 for all your employees. As alluded to, the leave has to be for a reason covered under the FMLA, such as:

• Welcoming a new baby into the family

• Adopting or fostering a child

• Taking care of a loved one (e.g., a spouse, child, or parent) with a serious health condition

• Dealing with serious health issues

To be eligible, your employees also have to:

• Have been with your company for at least a year.

• Have clocked in at least 1,250 hours over the past 12 months.

Your business must also have a workforce of 50 or more people within a 75-mile radius of your workplace.

What if your business already offers PTO?

General PTO can be taken for any reason. But if you’re filing Form 8994, the leave must be for specific circumstances listed under the FMLA.

To cash in on the credit for employers, you also need a dedicated paid family and medical leave policy that meets Internal Revenue Service (IRS) criteria. This is not the same as your general PTO policy.

How much tax credit can your business claim?

To determine how much you can claim, you first need to check how much qualifying leave you’ve paid out. You must have paid your employees at least half of their regular earnings while they were out on leave.

Claims start with a base credit rate of 12.5% for paying out 50% of an employee’s wages. For every percentage point you go above this, your credit rate increases by 0.25%, up to a maximum of 25%. That means the applicable percentage ranges from 12.5% to 25%.

For example, say you have an employee — Alex — who earns $1,000 per week. Alex takes four weeks of family leave and you pay them 60% while they’re out (i.e., $600 per week).

To figure out your credit, you would need to:

1. Identify the amount paid during the employee’s leave.

At $600 per week for four weeks, you pay Alex a total $2,400.

2. Determine the payment percentage.

You paid Alex 60% of their normal wages during their leave.

3. Calculate the credit percentage.

As mentioned, the base credit rate is 12.5% for paying 50% of an employee’s wages.

Since you paid 60% of Alex’s wages, that’s 10% more than the 50% threshold. Remember, you get 0.25% for each percent over 50%. So, for 10 percentage points, that’s 2.5%.

Add this 2.5% to the base rate of 12.5% to get a total credit rate of 15%.

4. Calculate the credit amount.

Multiply Alex’s leave payout ($2,400) by your credit rate (15%), and you get $360. This is the amount of credit that you can claim for this employee.

You then repeat this process for all eligible employees.

How do you apply for the credit?

To actually claim the credit, follow these steps:

1. Check your policy.

Make sure your company’s paid leave policy matches what’s needed to get the credit.

2. Keep detailed records.

Keep track of all the paid leave you’ve handed out for family or medical reasons. If you use an automated payroll system (like Remote), this is quick and simple.

3. Fill out Form 8994.

Fill out Form 8994. This is where you record how much paid leave you provided, and outline how much credit you’re due. 

You can find the form here, and see detailed instructions here.

4. Attach Form 8994 to your tax return.

Once you’ve filled out Form 8994, attach it to your company’s tax return, and submit it.

Simplify compliance with Remote

Keeping track of the various tax forms and credits in the US can be a huge challenge — and the last thing you want is to miss out on credits and tax breaks that you didn’t realize you were eligible for!

This is why it’s advisable to work with a payroll partner, like Remote. We ensure that you’re always fully compliant with all state, federal, and international payroll and employment laws, and provide guidance and support on credits like this. We can also help you fill out all relevant forms — such as Form 8994 — ensuring that you’re making the most of all relevant opportunities.

To learn more about how we can save you time and money, speak to one of our friendly experts today!

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