January 28, 2025
On January 15, 2025, the IRS issued important guidance (Revenue Ruling 2025-4) on the federal income and employment tax treatment of contributions and benefits paid under state-paid family and medical leave (PFML) (a.k.a. disability insurance and/or paid family leave, collectively “PFML”) programs, as well as the related tax reporting requirements.
The revenue ruling addresses tax treatment of state-based PFML programs; however, it does not address the federal tax treatment for fully insured or self-insured private plans. The revenue ruling also provides transition relief to employers, states, and the District of Columbia from certain withholding, payment, and information reporting requirements during calendar year 2025.
As background, several states have implemented their own state mandatory PFML programs to provide partial wage replacement for eligible employees who need to take time off from work due to the employees’ own serious health conditions or disability or to care for the employee’s family member with a serious health condition. However, the federal tax treatment of such contributions and benefits has been an area of confusion in the absence of prior IRS guidance.
The guidance clarifies how federal employment and income taxes are applied to contributions and benefits under state PFML programs.
Some state PFML programs require all or certain covered employers (e.g. “large employers”) to contribute all or a certain share of premiums to a state PFML program. The employer contributions are generally excluded from an employee’s gross income and are not subject to FICA, FUTA, or federal income tax withholding.
Employees’ contributions are treated as after-tax contributions. If the employer voluntarily pays employees’ share of contributions on behalf of them, the amount is treated as additional compensation to the employee and is subject to FICA, FUTA, and income tax withholding.
See Table 1 of the revenue ruling for further information.
The tax implications of PFML benefits paid to the employee can differ depending upon whether the payment is for family leave or medical leave.
Amounts paid to the employee by the state as paid family leave benefits must be included in the employee's federal gross income, regardless of whether the employee or employer paid the premiums. However, these amounts are not wages for federal employment taxes, such as Social Security and Medicare.
The state paying the benefits to the employee generally must file with the IRS and furnish to the employee a Form 1099 to report payment of these amounts.
An employee who receives medical leave benefit payments under a state PFML program must include the amount attributable to the employer portion of contributions in the employee’s gross income. Further, the amount also is subject to both the employer’s and employee’s shares of Social Security and Medicare taxes. The amount attributable to the employee’s portion of the contributions is excluded from the employee’s gross income, and this amount is not subject to Social Security or Medicare taxes. The revenue ruling provides additional guidance on other situations.
Table 2 of the revenue ruling outlines the type of benefits and the amounts attributable to employer and employee contributions for taxation purposes.
Employers should work with their tax counsel to determine the exact application to their situation.
The revenue ruling imposes a burden on employers to distinguish between taxable and non-taxable contributions and benefits and to issue correct reporting accordingly. Though the revenue ruling provides transition relief in calendar year 2025, employers with employees working in states with a PFML program should carefully review this revenue ruling with their legal and/or tax advisors as soon as possible. Additionally, employers should work with their payroll vendors to update the payroll systems to ensure accurate withholding and reporting, including employer and employee contributions and taxable benefits according to this revenue ruling.
Similar IRS guidance relating to the tax treatment of the private plan option under state PFML programs would be welcome.
PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
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