The IRS has released new guidelines on handling taxes for state-mandated Paid Family and Medical Leave (PFML) programs.
You may already be familiar with the Family Medical Leave Act (FMLA), which lets eligible employees take up to 12 weeks of unpaid, job-protected leave to care for themselves or a family member during specific medical or family situations. However, state-paid family leave programs (PFML) take this protection further, providing paid time off for these events.
If you’re an employer in one of the thirteen states with mandatory PFML programs, this information is crucial for you. States with paid-leave plans currently include:
- California
- Colorado
- Connecticut
- Delaware
- Maine
- Massachusetts
- Maryland
- Minnesota
- New Jersey
- New York
- Oregon
- Rhode Island
- Washington and the District of Columbia
Key Points
When employers contribute to state PFML funds, these payments are excise taxes. This classification means your company can deduct them on its taxes, and they don’t count as income for your employees.
The money you withhold from your employee’s wages for PFML is taken after tax and reported as part of the employee’s gross income for federal tax purposes. You will need to report this on their W-2 forms. If you are partnered with Nextep, we will handle this addition to the employee W-2s for you. Your employees might be able to deduct these contributions on their own tax returns.
How PFML Benefits Are Taxed
Family Leave Benefits: If your employees receive benefits for family leave, these payments are taxable. While the paid-out benefits are included in federal gross income, they are not considered wages, so you don’t need to withhold federal employment taxes on them. The state will handle reporting these payments on Form 1099 if they total $600 or more in a taxable year.
Medical Leave Benefits: The tax treatment of medical leave benefits depends on who contributed. If the benefits come from employer contributions, they are included in the employee’s total gross income and treated as wages for tax purposes, unless specific exclusions apply. If the benefits come from employee contributions, they are usually not taxable.
What this Means for Nextep PEO Clients
As your PEO, we’ve got you covered at Nextep! For clients with employees in states with PFML programs, we handle each step of administering these programs, including:
- Registering your account with the state program
- Collecting the required premiums via payroll deductions
- Remitting deductions to the state authorities
- Multistate compliance and reporting
- Determining their taxability
- Correctly reporting information on the employee’s W-2
- Case-by-case consultation from your HR Business Partner on how to handle leave requests
If your company has a reason to be exempt, you will first file directly with the state. Then, provide documentation of your exemption to Nextep so we can adjust our records and deductions.
As a refresher, employer contributions are deductible for you and don’t count as income for your employees. If you cover an employee’s required contribution, that amount is considered additional compensation and is subject to taxes for the employee. Different states have different PFML requirements. We track these variations to ensure compliance in each state.
Since contributions and payouts may affect an employee’s taxable wages, please be aware that the total gross income shown on the employee’s W-2 may differ from income for hours worked.
Deadline:
The IRS is giving everyone a break in 2025 to get used to these new rules. During this 2025 transition year, you won’t be penalized for not following the new withholding and reporting requirements for medical leave benefits from employer contributions. This delay gives you time to update your systems and processes.
By January 1, 2026, you’ll need to have your reporting and compliance systems fully aligned with the new guidelines.
Refer to the IRS Revenue Ruling 2025-4 for detailed information and consult your legal or tax advisors. As always, Nextep is also here to help.
