Federal Government Provides Tax Guidance for State Paid Family Leave Programs

January 30, 2025
Michael Bivona
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The IRS has recently released IRS Rev. Proc. 2025-4, which provides guidance to both employee and employer on how contributions to various state Paid Leave programs may be treated for federal tax purposes. They break the guidance down into several sections.

 

1. Contributions to State-Run Paid Family and Medical Leave (PFML) Programs

a. The guidance explains that employer contributions to a PFML program run by the state are tax deductible (as excise tax). An employee’s own contributions to a state PFML program are tax deductible, provided that the deductions do not fall below the allowable state maximums. 
b. If an employer pays an employee’s PFML contribution (for whatever reason), that amount is treated as compensation to the employee and is subject to the various taxes levied on employee wages (such as FICA, FUTA, and income). 
c. Third-party payments of PFML funds are not treated as taxable wages unless the employee has specifically made the withholding arrangement with the third party. 

 

2. Benefits from State-Run Paid Family and Medical Leave (PFML) Programs

a. Benefits received from a state PFML program are classified differently depending on whether the benefits are from Family Leave or Medical Leave:

i. Family Leave: Both employer and employee benefits must be included in the employee’s gross income. These benefits are subject to Medicare and Social Security taxes.
ii. Medical Leave: Employer contributions to medical benefits must be included in the employee’s gross income (except as otherwise provided in IRS Section 105). This is considered wages. In contrast to Family Leave, however, Medical Leave benefits attributable to the employee’s contribution of PFML payments are not considered gross income for federal reporting purposes and are not subject to Medicare or Social Security taxes. 

 

It is important for both employers and employees to understand how different PFML contributions and benefits are treated by the IRS. Employers must ensure that they can differentiate between what is considered taxable wages and what is not. They must be able to accurately report this information on a W-2 form. All employers subject to this IRS Bulletin should ensure that their withholding and reporting practices align with what the IRS demands. 

 

You can read the entire IRS Bulletin HERE.

Heather Reynolds, ESQ

CCO - Administrative Officer
FNA Insurance Services, Inc.
516-348-7199 |[email protected]

Michael Bivona, JD

Compliance Paralegal
FNA Insurance Services, Inc.
516-348-7135 |[email protected]