Mandatory Paid Leave – Taxes? Offsets? So Many Questions.

To tax or not to tax? How to coordinate with other available paid leave? These are some of the questions recently tackled by the IRS and the Wage and Hour Division of the Department of Labor. An ever-growing number of states, over a dozen by now, have passed paid family leave laws. One of the outstanding questions has been how the paid family leave contributions and how the paid family leave benefit will be treated for federal tax purposes. To that end, Revenue Ruling 2025-4 has been issued. In summary, it provides for handling of employer and employee contributions as follows:

Federal Income Tax Consequences on Contributions to State Paid Family and Medical Leave Programs

• Taxation of employer required contributions:
  • Employer may deduct the contribution as an excise tax under § 164.
  • Employee does not include the employer’s contribution in his/her gross income.
• Taxation of employee required contributions:
  
  • Employer includes the employee contribution as wages on employee’s W-2.
  • Contribution is included in gross income as wages.
  • Employee may deduct the contribution as state income tax under IRC § 164 if employee itemizes deductions
    • The deduction cannot exceed the State and Local Tax (SALT) deduction limitation ($10,000).
• Taxation in instances when employer chooses to fund all or a portion of the employee’s contribution (pick-up amount):
  • Employer can deduct the pickup payment as an ordinary and necessary business expense under IRC § 162.
  • Must include the employer voluntary payment as wages on employee’s W-2
  • Counted as additional compensation to employee and is included in gross income as wages.
  • Employee can deduct the employer contribution as state tax if deductions are itemized and if the deduction does not exceed the SALT deduction limitation.

Federal Income Tax Consequences of Family and Medical Leave Benefits Paid by State Paid Family Medical Leave Programs

• Family Leave Benefits:
  • Taxation of benefits attributable to employer contribution:
  • • Employee includes the benefit amount attributable to the employer contribution in employee’s gross income (contribution not previously included in gross income). This amount is not counted as wages and is not subject to employment tax.
  • • State must file with the IRS and furnish employees a Form 1099.
  • Taxation of benefits attributable to employee contribution:
  • • Employee must include the amount attributable to the employee contribution, as well as any employer pick-up of the employee contribution, in employee’s gross income. This amount is not counted as wages and is not subject to employment tax.
  • • State must file with the IRS and provide employees a Form 1099.
• Medical Leave Benefits:
  • Taxation of benefits attributable to employer contribution:
  • • Employee includes the benefit amount attributable to an employer contribution in the employee’s gross income (contribution not previously included in gross income). This amount is counted as wages and is subject to employment tax.
  • • Sick pay reporting rules apply to benefits attributable to employer contributions.
  • Taxation of benefits attributable to employee contribution:
  • • Benefits attributable to employee contribution and any employer pick-up of the employee’s contribution is excluded from gross income.

This Revenue Ruling only addresses paid family leave made available through a state fund. It does not address PFL made available through an insured or self-funded arrangement.

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. This information is provided as general guidance and may be affected by changes in law or regulation. This information is not intended to replace or substitute for accounting or other professional advice. You must consult your own attorney or tax advisor for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.