On January 15, 2025, the Internal Revenue Service (IRS) released Revenue Ruling 2025-4 (providing guidance on the taxation and reporting of contributions and benefits under state paid family and medical leave (SPFML) programs.
Key Highlights
Employer and Employee Contributions
- Employee-required SPFML contributions paid by an employer are considered taxable income for federal tax purposes and must be reported on the employee’s Form W-2 (Boxes 1, 3, and 5).
- Employer-mandated contributions are treated as state taxes, not taxable to employees, and require no federal reporting by employers.
Taxation of SPFML Benefits
- Family Leave Benefits:
- Fully taxable as federal gross income.
- Not considered wages for Social Security and Medicare taxes.
- The state administering the benefits must report payments to the IRS and provide employees with Form 1099.
- Medical Leave Benefits:
- Generally taxable unless related to an employee’s own serious health condition.
- The taxable portion depends on the employer’s premium contribution percentage. For example, if an employer pays 40% of the premium, then 40% of the benefits received are subject to taxation.
- Family Leave Benefits:
Transition Period and Employer Compliance
The IRS has designated 2025 as a transition period for states and employers to implement the necessary reporting and compliance systems. Full enforcement of RR 2025-4 will begin in 2026, making it imperative for employers to update payroll and tax reporting procedures before the transition period ends.
Interaction Between State PFML and FMLA
The U.S. Department of Labor (DOL) clarified how state PFML programs interact with the Family and Medical Leave Act (FMLA). The opinion letter from the Wage and Hour Division (WHD) outlined the following key rules:
- No mandatory use of paid leave: Employers cannot require employees to use accrued paid leave (e.g., vacation or sick time) while receiving state PFML benefits.
- Voluntary “top-off” agreements: Employees and employers can agree to use accrued leave to supplement state-paid benefits and bring total pay to 100%.
- FMLA designation: Employers must classify leave under a state program as FMLA leave if it meets FMLA qualifications.
- State-specific leave: If state PFML covers situations not recognized by FMLA (e.g., caring for a grandparent), that leave does not count against FMLA entitlement.
Employer Considerations
To remain compliant with these regulations, employers should:
- Review RR 2025-4 with tax and legal professionals.
- Update payroll systems to properly classify and report employee contributions and benefits.
- Educate employees on their rights and responsibilities under both FMLA and state PFML programs.
- Ensure FMLA compliance by correctly designating leave and preventing policy conflicts.