IRS Tax Guidance Issued For State PFML Programs

Written by National Employee Benefits Practice | Feb 4, 2025 2:09:43 PM

Summary: The Internal Revenue (IRS) issued Revenue Ruling 2025-4 (“Revenue Ruling”) on January 15, 2025, providing much-awaited and helpful guidance regarding the federal income and employment tax treatment of contributions and benefits under state/local paid family and medical leave (PFML) programs, as well as related reporting requirements.

Read on for more information and employer considerations.

PFML Background

In the absence of a federal paid family and medical leave (PFML) program for U.S. workers, an increasing number of states (and the District of Columbia) have enacted their own PFML programs, providing full or partial wage replacement to employees who need time away from work for certain reasons including, but not limited to:

Caring for an employee’s own non-occupational injuries, illnesses, or medical conditions,
Caring for a family member’s serious health condition,
Bonding with a new child,
Supporting a family member who is on active military service duty, and
Addressing certain medical or non-medical needs of an employee or their family member arising from domestic violence.

Generally, these mandatory PFML programs can vary widely in their structure, scope, and duration of benefits in different states and the District of Columbia.

Certain state PFML laws also permit employers to satisfy their PFML obligations through an approved private PFML plan.

State PFML programs generally require some combination of employer and employee contributions to fund the program payments for employees claiming PFML benefits. Some state PFML laws require different contribution ratios for employers and employees depending on the size of the employer.

Additionally, some state PFML programs allow employers to voluntarily contribute from its own funds all or a portion of its employees’ otherwise required contribution, instead of withholding such amounts from their employees’ wages (referred to as “employer pick-up” in the Revenue Ruling).

Revenue Ruling 2025-4

This Revenue Ruling was issued in response to requests from interested stakeholders to clarify the federal tax treatment of state PFML programs.

Below are key highlights from the Revenue Ruling:

Employer Contributions: Employers can generally deduct the amount they contribute to mandatory PFML programs as excise tax payments under Internal Revenue Code (IRC) § 164.
Employee Contributions: Employees can deduct their contributions to a mandatory PFML program that are withheld from their employer pay as income tax payments if they itemize deductions, provided it does not exceed the state and local income tax (SALT) deduction limit.

Although these amounts are withheld from the employee’s wages, they are included in the employee’s gross income, and the employer must report the contributions on the employee’s Form W-2.
Benefit Payments: The Revenue Ruling emphasizes taxation distinctions between paid family leave benefits and medical leave benefits, both received under state PFML programs:
- Paid Family Leave benefit payments under state PFML programs must be included in an employee’s gross income for federal income tax purposes. However, paid family leave benefit payments are not considered “wages” for federal income tax purposes, purposes, including Federal Insurance Contributions Act (FICA) taxes, Federal Unemployment Tax Act (FUTA) taxes, and federal income tax withholding (FITW).
  
  The Revenue Ruling clarifies paid family leave benefits under state PFML programs are “are more closely analogous to social security benefits.” As such, states are required to file with the IRS and provide employees with a Form 1099 to report paid family leave benefit payments.
- For medical leave benefit payments received under state PFML programs, only the amount attributable to the employer portion of the contributions is included in the employee’s gross income and is subject both to the employer’s and employee’s shares of Social Security and Medicare taxes. The amount of the medical leave payment attributable to the employee’s portion of the contributions (including any employer pick-up contributions) is excluded from the employee’s gross income, and this amount is not subject to Social Security or Medicare taxes.
The guidance provided within this Revenue Ruling does not apply to private or self-insurance PFML plans or the amounts received by the employees as benefits under these plans.
The Revenue Ruling contains extensive guidance with respect to very technical aspects in connection with the taxation of PFML contributions and benefit payments, impacting both employers and employees.

For ease of understanding and taxpayers’ ready reference, the Revenue Ruling includes two tables (detailed below) summarizing the Revenue Ruling’s holdings with respect to the tax impact of state PFML contributions and benefit payments to both employers and employees.

Table 1: Summary of the Federal Income Tax Consequences of Contributions to State PFML Programs

Types of contributions	Consequence to employer	Consequence to employee
Employer contribution	Employer may deduct the employer contribution as an excise tax under IRC § 164	Employee does not include the employer contribution in employee’s Federal gross income.
Employee contribution	Employer must include the employee contribution as wages on employee’s Form W-2.	The employee contribution is included in employee’s Federal gross income as wages. Employee may deduct the employee contribution as State income tax under IRC § 164, if employee itemizes deductions on employee’s Federal income tax return, but only to the extent the deduction for State tax paid does not exceed the SALT deduction limitation provided under IRC § 164(b)(6).
Employer pick-up of employee contributions	Employer may deduct the employer pick-up payment that employer pays from employer’s funds as an ordinary and necessary business expense under IRC § 162. Employer must include the employer voluntary payment as wages on employee’s Form W-2.	The employer pick-up is additional compensation to employee and is included in employee’s Federal gross income as wages. Employee may deduct the employer pick-up of the employee contribution as State income tax under IRC § 164, if employee itemizes deductions on employee’s Federal income tax return, but only to the extent the deduction for State tax paid does not exceed the SALT deduction limitation provided under IRC § 164(b)(6).

Table 2: Summary of the Federal Income Tax Consequences of Family and Medical Leave Benefits Paid by State PFML Programs

Types of state PFML benefits

Amount attributable to employer contribution

Family leave benefits

Employee must include the amount attributable to the employer contribution in employee’s Federal gross income (employer contribution not previously included in employee’s Federal gross income). This amount is not wages.

State must file with the IRS and furnish to employee a Form 1099 to report these payments.

Employee must include the amount attributable to the employee contribution, as well as to any employer pick-up of the employer pick-up of the employee contribution, in employee’s Federal gross income. This amount is not wages.

State must file with the IRS and furnish to employee a Form 1099 to report these payments.

Medical leave benefits

The sick pay reporting rules apply to the medical leave benefits attributable to employer contributions. These payments are third-party payments (by a party that is not an agent of the employer) of sick pay.

The amount attributable to the employee contribution, as well as to any employer pick-up of the employee contribution, are excluded from employee’s Federal gross income.

Effective Date and Transition Period

Although the Revenue Ruling states it is effective for payments made on or after January 1, 2025, it provides a transition period from IRS enforcement and administration of information reporting requirements and other rules detailed above for the 2025 calendar year. The IRS is providing this transition period for the 2025 calendar year “to provide states and employers time to configure their reporting and other systems and to facilitate an orderly transition to compliance with those rules.”

Employer Considerations

This Revenue Ruling provides helpful tax and payroll-related guidance for employers who operate in, and have employees working in, states and localities with mandated PFML programs, which currently includes 14 states^[1] and the District of Columbia.

The guidance under this Revenue Ruling arrives at an opportune time as increasingly more states continue to enact PFML programs and the fact that there was no federal tax guidance with respect to these state PFML benefits. In fact, this Revenue Ruling was included in the IRS’s most recent 2024-2025 Priority Guidance Plan here.

Employers are advised to work with their tax advisors to ensure that their payroll systems and accounting practices comply with this recent Revenue Ruling ahead of the 2026 calendar year, when the transition period is scheduled to end.

With respect to the tax guidance directed towards employees (as individual taxpayers) provided under this Revenue Ruling, employers should advise their employees to confer with their own personal tax advisors, and refrain from providing formal tax advice to employees directly.

On a related note, the U.S. Department of Labor recently released an opinion letter providing clarifying guidance for employers regarding the intersection of federal Family and Medical Leave Act (FMLA) regulations and state PFML programs. Click here for a Risk Strategies article with more details.

Risk Strategies helps employers navigate the ever-changing and complex statutory PFML landscape. Contact your Risk Strategies account team with any questions or contact us directly here.

[1] California, Colorado, Connecticut, Delaware, Hawaii (disability only), Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island and Washington.

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