State Paid Family and Medical Leave – Tax Considerations.

A number of states, including California, Colorado, Connecticut, Massachusetts, New Jersey, New York, and Washington, have instituted state-sponsored Paid Family and Medical Leave programs in recent years.

State PFML programs provide certain benefits, such as wage replacement, to qualifying employees recovering from illness, a medical condition, or a non-occupational injury, or caring for a family member.

Employers have had to navigate the rapidly developing state PFML landscape without clear guidance on the taxability and reporting of state PFML contributions and benefits.

Recently, however, the IRS issued much-needed direction on state PFML in the form of Revenue Ruling 2025-04.

Though there is significant additional nuance to the Revenue Ruling, broadly speaking, the IRS advises that employers should treat state PFML contributions and benefits as follows:

  • Program Contributions: Required employer contributions to state PFML programs on behalf of employees are excludible from employees’ gross income and not subject to withholding. Such employer contributions are deductible by the employer.
  • Benefits Paid: For family leave benefits, amounts attributable to employer contributions are taxable income to employees but not treated as wages, and thus, not subject to withholding or reportable. For medical leave benefits, amounts attributable to employer contributions are generally treated as taxable income and wages unless otherwise excludible under Sections 104 or 105 of the Code (relating to amounts treated as received through accident or health insurance).

Whether your company has been reporting such contributions and benefits in line with the above or not, as states continue to develop PFML programs, your company should take the time to understand its tax obligations to avoid missteps related to payroll administration and tax reporting.

It is crucial that employers

  • fully understand their obligations to PFML programs, including with respect to tax reporting;
  • diligently track the sources of all contributions and benefits payable with respect to state PFML programs to ensure proper tax treatment; and
  • coordinate with their payroll departments – and professional employer organizations, as applicable – to confirm all automated systems are attune to these requirements.

D+G will continue to track this developing area of compliance.