On January 16, 2025, the IRS released Revenue Ruling 2025-4, offering guidance on how contributions and benefits under state-mandated Paid Family and Medical Leave (PFML) programs are treated for federal tax purposes. With 14 states and Washington, D.C. currently operating mandatory PFML programs, this clarification impacts both employers and employees when it comes to income reporting and employment taxes. Here's a breakdown of what the new ruling means for payroll deductions, employer contributions, and benefit payments under these programs.

1. Employee Contributions

   • If an employee is required to contribute to the state-mandated paid FMLA program through payroll deductions, those amounts are considered taxable income for federal income tax and employment tax purposes (e.g., Social Security)

   • These contributions must be reported in Box 1 of the W-2

2. Employer-Paid Contributions

   • If an employer voluntarily pays an employee’s required contribution, that amount is taxable and must be reported in Boxes 1, 3, and 5 of the W-2

3. Employer-Mandated Contributions

   • If an employer is required by state law to make premium payments, those contributions are treated as state taxes and are not taxable income to the employee
   • In this case, the employer has no federal reporting obligations for these employer-mandated contributions

In addition, any benefits paid to an employee under state-mandated paid family leave are to be included in the employee’s gross federal income, regardless of whether the employer or the employee paid the premiums. However, these benefits are not considered wages for federal employment tax purposes, such as Social Security and Medicare and the state paying the benefit to the employee will furnish a Form 1099.

Special Rule for Employee’s Own Serious Health Condition

However, the tax treatment changes if an employee takes leave due to their own serious health condition. In this case, a portion of the benefit received may be considered taxable income based on the employer's mandated cost.

For example, if the employer is required to pay 40% of the cost, then 40% of the benefit amount will be imputed to the employee as taxable federal income. In addition, employment taxes will also have to be paid. Any premium amount the employer voluntarily pays on behalf of the employee is not imputed to the employee when benefits are paid.

Employers should consult with their CPA or legal counsel for further guidance on compliance and reporting requirements.