IRS Guidance on Tax Treatment of State Paid Family & Medical Leave (PFML)
On 1/15/2025, the IRS issued new ruling providing federal tax guidance for state-administered Paid Family and Medical Leave (PFML) programs — excluding private employer plans and noting that state tax treatment may differ.
Update 12/29/2025:
The IRS has issued Notice 2026-6, which extends the transitional relief period under Revenue Ruling 2025-4 for state paid family and medical leave (PFML) tax and reporting requirements through calendar year 2026. Under this extension, employers and states participating in PFML programs will not be required to comply with certain federal income tax withholding, employment tax, and related reporting obligations for medical leave benefits attributable to employer contributions in 2026, nor will penalties for failures to report/apply these requirements be enforced during this period.
Please note, however, that the transitional relief does not apply to voluntary employer paid employee contributions. Amounts an employer voluntarily pays on behalf of an employee for their PFML contributions must still be treated as wages and reported on the employee’s Form W-2 in accordance with federal tax rules beginning in 2026.
On January 15, 2025, the Internal Revenue Service (IRS) issued Revenue Ruling 2025-4, which provides guidance on the taxation of employee contributions to and benefits from state administered Paid Family and Medical Leave (PFML) programs in 2025 and beyond. Please note this ruling applies only to state administered programs and has no effect on private employer plans. In addition, state income tax rules may or may not comply with the federal tax treatment discussed in detail below.
2025 Transition Year - Enforcement Relief
IRS recognizes that states and employers need time to update the programs and procedures to apply with the new rules and set 2025 as a transition year without enforcement action.
Key Tax Treatment Rules Under Revenue Ruling 2025-4
Here is a summary of the most important tax-related items that apply to PFML contributions and benefits.
| Scenario | Tax Treatment |
|---|---|
| Employer covers the employee contributions for the employee (does not withhold the funds from employees check) | Treated as taxable income and taxable wages to the employee — must be reported on Form W-2 (Boxes 1, 3, and 5) if employer pays on behalf of the employee. |
| Employer’s mandatory PFML contributions (state-mandated employer portion) | Considered state tax under federal rules — not taxable to the employee |
| State-paid PFML Family Leave benefits (e.g., bonding with a new child, caring for a sick family member) | Included in the employees’ federal gross income. However, these payments are not considered “wages” for federal employment taxes, and they are not reported on Form W-2. The state must issue Form 1099-G directly to the employee. The employee must report the benefits on their personal tax return. |
| State-paid PFML Medical Leave benefits (i.e., benefits because of the employee’s own serious health condition) portion attributable to employer contributions | Included in gross income and considered wages for federal employment tax purposes (subject to SS/MED taxes) and treated in payroll as “third party sick pay.” The state will issue a report to the employer with the paid “third party sick pay”, which the employer needs to enter in payroll using the “third party sick pay” option to pay the employer portion of SS/MED taxes) and report it on the employee’s Form W-2. |
| State-paid PFML Medical Leave benefits — portion attributable to employee contributions (or employer pick-up of employee contributions) | Excluded from gross income and not considered wages or sick pay under federal employment tax rules. |
What Employers Need to Do
If you have employees in states with mandatory PFML and the employer is paying the employee contributions on behalf of the employees (covering the premiums for employees), please contact your client success representative to ensure your payroll is configured to include the employer-covered premiums in the employee’s taxable income and reported on Form W-2.
For medical leave benefits, understand which portion is taxable (employer-contribution portion) vs. non-taxable (employee-contribution portion).
Ensure state-paid family leave benefits are not reported on Form W-2. The state will issue Form 1099-G directly to the employee and the employee will need to report these benefits on his/her personal tax return.
Note the IRS rules apply only to state-administered PFML programs, not to private or employer-provided paid leave plans.
Advise employees to consult with their accountant or personal tax return preparer if they need assistance to report any state paid benefits on their personal tax return.
Please send any questions to tax@strongpay.com and our team will be happy to review and assist you.