Frost Law
The IRS issued Revenue Ruling 2025-4, which provides guidance on the federal tax treatment of state-run paid family and medical leave (PFML) programs. Many states now require employers and employees to contribute to a fund that provides paid leave for workers who need time off due to their own medical conditions or to care for family members. The ruling explains how these contributions and benefits should be treated for federal income tax purposes and federal payroll tax purposes, as well as what federal tax reporting requirements are applicable.
While the revenue ruling is effective for payments made on or after January 1, 2025, the overall approach outlined in the revenue ruling could be applied to prior payments if there is a reasonable basis for that treatment.
Frost Law can help you understand how these rules apply to your specific situation. Call us today at (571) 490-8269 for a consultation or fill out our contact form.
If an employer pays a portion of the PFML tax on behalf of an employee, this amount can be deducted on the employer’s tax return as a §164 excise tax. It is not taxable income to the employee.
An employee’s required PFML contributions are considered payment of state income taxes. Employers report these amounts as wages on the employee’s Form W-2, but employees may be able to deduct them as an itemized deduction (subject to the individual $10,000 limitation).
If an employer voluntarily pays part of the employee’s required PFML tax, this amount is taxable income to the employee and must be included in the employee’s wages on Form W-2. The employee may deduct this amount as state income tax as an itemized deduction (subject to the individual $10,000 limitation).
Payments received from a state PFML fund for family leave (e.g., bonding with a child or caring for a sick family member) are taxable income but are not subject to payroll taxes. An employee will receive Form 1099 from the state for these payments.
Payments for an employee’s own medical leave are tax-free to the extent the payment is attributable to the employee’s contribution. The payment amount attributable to the employer contribution portion funded by the employer is taxable, treated as wages (and therefore subject to payroll taxes), and considered §3402(o) third-party sick pay.
To allow states and employers time to adjust, the IRS will not enforce some reporting and payroll tax requirements until 2026. However, employers should begin preparing now to avoid compliance issues.
Don't wait until 2026 to address these changes. Contact Frost Law today at (571) 490-8269 or fill out our contact form to ensure your business is prepared for the upcoming PFML reporting requirements.
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