In recent years, many new state-paid family and medical leave programs have been introduced. In response, the IRS released Rev Rul 2025-04 to guide employers on how elements of these programs are taxed. The Revenue Ruling addresses three main questions:
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How are contributions under state-paid family and medical leave programs taxed?
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How are benefits paid under state-paid family and medical leave programs taxed?
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What are the related tax reporting requirements?
Tax Consequences of Contributions
The federal income tax consequences of contributions paid to state Paid Family and Medical Leave (PFML) programs differ based on who pays the contributions.
Employee Contributions
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Employee contributions are taxable and must be included in an employee’s gross income as wages.
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Employers must report employee contribution as wages on employee’s Form W-2.
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Employees may deduct their PFML contributions as a state income tax (under §164) if they itemize deductions on their federal income tax return, subject to the State and Local Tax (SALT) limitation.
Employer Contributions
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Employers may deduct the employer contribution for PFML programs as an excise tax (under §164)
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There is no tax consequence to the employee for employer contributions. They are not included in the employee’s federal income.
Employer Pick up of Employee Contributions
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An employer’s pick-up payment (any portion of the contribution designated in the law to be paid by the employee) is additional compensation to an employee and must be included in the employee’s gross income as wages.
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Employees may deduct the employer pick-up of the employee contribution as state income tax (under §164) if they itemize deductions on their federal income tax return, subject to the SALT limitation.
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Employers must include the employer voluntary payment (the employee contribution portion) as wages on employee’s Form W-2.
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Employers may deduct employer pick-up payments (paid from employer’s funds) as an ordinary and necessary business expense under §162.
Tax Consequences of Benefits Paid – Family Leave
The tax treatment of benefits paid for family leave under state PFML laws differs from those paid for medical leave. Benefit taxation of family leave payments is unique in that family leave benefits must be reported in the employee’s federal gross income; however, they are not considered wages.
Amount Attribute to Employee Contribution
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Employees must include the benefit amount attributable to their employee contribution (as well as to any employer pick-up of the employee contribution) in their federal gross income.
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This amount is not considered wages.
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States must file with the IRS and furnish the employee with a Form 1099 to report these payments.
Amount Attributable to Employer Contribution
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Employees must also include the benefit amount attributable to an employer contribution in their federal gross income (if the employer contribution is not previously included in employee’s federal gross income).
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This amount is not considered wages.
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States must file with the IRS and furnish the employee with a Form 1099 to report these payments.
Tax Consequences of Benefits Paid – Medical Leave
The tax treatment of benefits paid for medical leave under state PFML laws differs from those paid for family leave. Benefit taxation is based on whether the contribution (premium) was paid by the employee or the employer. If the contribution was split between the employee and the employer, taxation of the benefit is also split on a prorated basis.
Amount Attribute to Employee Contribution
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The benefit amount attributable to the employee contribution, as well as to any employer pick-up of the employee contribution, is excluded from the employee’s federal gross income.
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This amount is not taxable income.
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The theory here is that the contribution (premium) was paid with already-taxed dollars, so the benefit is received on a tax-free basis.
Amount Attributable to Employer Contribution
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The benefit amount attributable to the employer’s contribution must be included in the employee’s federal gross income.
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This amount is considered wages.
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The sick pay reporting rules apply to the medical leave benefits attributable to employer contributions. These payments are third-party payments of sick pay (by a party that is not an agent of the employer).
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The corollary theory is that the contribution (premium) was paid with untaxed dollars, so the benefit is received on a taxable basis.
Resources
IRS Revenue Ruling 2025-04
