United States | Employment Tax | Internal Revenue Service releases guidance on state PFML programs


February 10, 2025

Employment Tax

United States | Internal Revenue Service releases guidance on state PFML programs

Summary

The IRS released Revenue Ruling 2025-4, providing long awaited guidance to the taxability of contributions to and benefits paid pursuant to state paid family and medical leave (PFML) statutes.

Rev. Rul. 2025-4 addresses the federal income tax and federal employment tax treatment of contributions and benefits paid in certain scenarios under a state PFML statute. The highlights most pertinent to employers include the federal tax treatment of employee contributions paid by employers on behalf of employees (“employer pick-up contributions”) and the taxability and reporting requirements for certain benefits paid under state PFML statutes.

In determining the federal tax treatment of benefits paid under such statutes, the revenue ruling distinguishes between payment of benefits related to qualifying medical leave (PML) and benefits that are considered family leave (PFL), and taxability of benefits paid that are attributable to employee contributions versus employer contributions. Qualifying medical leave generally refers to time off from work taken by an eligible employee that is made necessary by the individual’s own serious health condition. Note, the revenue ruling does not provide guidance on private plans.

The detail

  • Employee contributions which are required under a state PFML statute are generally characterized as a tax and do not reduce an employee’s gross wages.
  • An employer’s payment of an employee’s required PFML contributions are treated as additional compensation to the employee. Such employer pick-up contributions are wages for federal income tax, FICA, and FUTA purposes, and subject to employer withholding and reporting on Form W-2.
  • PFL (family leave) benefits paid to employees by the state under a PFML statute are included in the employee’s gross income but are not included in wages for federal employment tax purposes. The employer has no withholding or reporting obligation with respect to such PFL benefits paid directly by the state to the employee.
  • PML (medical leave) benefits paid to employees by the state under a PFML statute are only included in the employee’s gross income to the extent benefits are attributable to employer contributions that were not already included in the employee’s gross income.
  • PML benefits attributable to employee contributions and employer pick-up contributions are excluded from an employee’s gross income and are neither sick pay nor wages subject to federal employment taxes.
  • The amount of the employee’s PML benefits calculated as attributable to the employer’s contributions are included in the employee’s federal gross income and are considered wages for FICA and FUTA purposes. Such payments are considered a payment of third-party sick pay (by a party that is not an agent of the employer) and those rules should be reviewed to determine the employer’s responsibilities with respect to such PML benefit payments (e.g., reporting, depositing, etc.).

Note, Rev. Rul. 2025-4 is effective for payments made on or after January 1, 2025, however calendar year 2025 will be regarded as a transition period for purposes of IRS enforcement and administration of the requirements, during which time the states and employers will not be required to comply with information reporting and withholding requirements related to medical leave benefits, and will not be required to treat amounts the employer voluntarily pays from its own funds of any part of an employee’s otherwise required contribution a state PFML program as wages for federal employment tax purposes. This transition period is for calendar year 2025 only.

How we can help

Vialto can assist you in complying with your responsibilities related to state paid leave programs, including determining the federal taxability and reporting of contributions and benefits, and state-specific taxability and reporting requirements, assisting with any required state PFML registrations, calculating employee and employer contribution amounts, determining which employees are covered under the program, drafting employee communications, and assisting with wage reporting.

Please reach out directly to your Vialto contact or one of the individuals listed below to discuss next steps.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Tina Schrob
Partner

Priya Schwartzburt
Director

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