Employer Credit for Paid Family and Medical Leave: Form 8994

Is the Employer Credit for Paid Family and Medical Leave Worth it for Venture Backed Startups? **NO.  While many startups have employees who go on maternity/sick/COVID leave, the vast majority already have paid leave plans in place and exceptionally few meet the requirement that that employee was paid less than $78,000 in 2020.  Across the 500+ startups we worked with in 2020, none were eligible for the Employer Credit for Paid Family and Medical Leave.

This is a federal tax credit offered by the IRS that is available to startups who paid wages to their employees while they were on family and/or sick leave.  It is designed to reimburse employers for employees who fall sick, allowing them to retain their employment without causing as much burden to the employer.

In order to claim the credit, startups must have an official written policy in place that meets certain requirements, including:

• Offering >2 Weeks of Paid Family & Medical Leave for qualifying employees.
• A stipulation that the wages paid while on leave are at least >50% of the teammates usual wage.
• “Non-Interference” language if your startup employed at least one qualifying employee who was not covered by the Family and Medical Leave Act (FMLA).

In general a qualifying employee is: 

• Has worked for the startup for >1 year, AND
• Made less than $78,000 in 2020 

What qualifies as a leave of absence?

There are many qualifying leaves of absence, but the most common are:

• Maternity/Paternity leave
• Sick leave for a serious health condition 
• Hospice leave (to provide for an immediate family member with a serious health condition)

What if a startup already provides Paid Time Off (PTO) and/or Sick Leave?

If an employer already provides PTO or sick leave, or receives State/Local funding for that leave, that paid leave is not considered family and medical leave and wont be taken into consideration for the credit.  In other words, if your employee took sick leave for a COVID related illness, the startup cannot “double dip” and take the Employer Credit for Paid Family and Medical Leave.

The credit is a function of how much was paid to the employee while on leave, with a maximum of 3 months.  The percentage starts at 12% and caps at 25%.  If your employee was paid less than $78,000 in salary in 2020, the startup would receive up to $19,500 in Employer Credits for Paid Family and Medical Leave.

You can apply for the Employer Credit for Paid Family and Medical Leave on form 8994 and 3800, which is a part of the 1120 C-Corporation Income Tax Return, due 4/15 every year and can be extended to 10/15 every year.

If you would like more information on the employer credit for paid family and medical leave, you can check out the Form 8994 section on the IRS website here.