© 2024 American Payroll Institute, Inc.
Governors From Nine States Ask IRS for Guidance on Taxability of
Paid Family and Medical Leave Contributions, Benefits
Recently, the governors from nine states wrote a letter
to Internal Revenue Service (IRS) Commissioner Daniel
Werfel, asking for guidance regarding the federal tax treatment
of premiums (sometimes referred to as employer and/or
employee contributions) and benefits under state paid family
and medical leave (PFML) programs [Letter to Daniel Werfel,
1-18-24 Office of Colorado Governor Jared Polis, News Release,
1-22-24]. The nine states are: Colorado, Connecticut, Maryland,
Massachusetts, Minnesota, New Jersey, New York, Oregon, and
Washington.
Need for IRS guidance
PFML programs vary by state. Some state programs are
funded by employer and employee contributions. In other
states, only employers or only employees are required to make
contributions. In some states, the employer is permitted to pay
the employee’s share of contributions.
The governors are seeking guidance on the issue of the
tax treatment of PFML premiums and benefits under state
law. According to the letter, “the most recent publicly available
guidance on this matter is the IRS’ Chief Counsel Memorandum
from 2005, which predates most state programs and is not
especially definitive.” The governors want the IRS to issue
clarifying, current guidance on how both employers and
employees should treat PFML premiums and benefits.
Impact on payroll professionals
The letter describes the uncertainty employers face
regarding the proper calculation of PFML payroll taxes and
the reporting of premiums withheld by employers from
employees. States do not have clarity on whether Forms 1099
should be issued.
Employee personal income tax questions, concerns
In particular, the letter asks for guidance on whether
taxability hinges on the taxpayer (employee) itemizing
deductions and claiming the state and local tax (SALT)
deduction, and what to do if the amount of the PFML benefits
exceed the amount of premiums paid.
According to the governors, the lack of guidance “creates
a substantial risk of an unexpected and large tax liability” for
employees “who rely on these programs to take family leave,
deal with a personal illness, or take care of vulnerable family
members.” The governors are concerned that taxing PFML
benefits would create challenges, especially for low and
moderate-income families.
Because the states cannot provide guidance on taxability
without clear federal guidance, employees are unsure as to
whether they will face a tax obligation after using the benefits,
and the tax owed could be thousands of dollars for a single
beneficiary, according to the letter.
Potential for double taxation
Many state PFML programs generally operate as social
insurance programs. This means that not allowing a deduction
for contributions and taxing benefits effectively represents
double taxation for employees, according to the letter. The
governors explain that taxation of wage replacement is
consistent with the IRS’ treatment of other programs. However,
the governors suggest that the IRS should issue clarifying
guidance that would ensure that program participants are
not taxed on both mandatory contributions paid and benefits
received. According to the letter, taxation on benefits received
makes more sense than taxation on monthly premiums, which
should not be considered taxable income.
States with PFML, SDI programs
California, Colorado, Connecticut, Delaware (effective
January 1, 2025), District of Columbia, Maine (effective January
1, 2025), Maryland (effective October 1, 2024), Massachusetts,
Minnesota (effective January 1, 2026), New Jersey, New
York, Oregon, Rhode Island, Washington, and San Francisco,
California, have established PFML programs that vary but
generally provide compensation to employees who take time
off from work to care for a seriously ill family member or to
bond with a new child. Many are administered as a part of or
in a similar manner to state disability insurance (SDI) programs,
requiring employee and/or employer contributions.
Note: California, Hawaii, New Jersey, New York, Puerto
Rico, and Rhode Island provide benefits to employees who
are temporarily disabled by an injury or illness that is not
job-related through a tax-supported state fund (workers’
compensation covers job-related injuries or illnesses). The SDI
funds operate in much the same way as state unemployment
insurance systems and under many similar rules.
Be Aware of Deadlines for State Unemployment Insurance
Voluntary Contributions
Employers in 27 states (nearly all using the reserve ratio
method of experience rating) might be able to make
voluntary contributions to their unemployment insurance
(UI) tax accounts to reduce their tax rates. Before making a
voluntary contribution, the employer must determine if the
amount of the contribution will be less than the increased
February 5, 2024 Volume 26 Issue 3
Governors From Nine States Ask IRS for Guidance on Taxability of
Paid Family and Medical Leave Contributions, Benefits
Recently, the governors from nine states wrote a letter
to Internal Revenue Service (IRS) Commissioner Daniel
Werfel, asking for guidance regarding the federal tax treatment
of premiums (sometimes referred to as employer and/or
employee contributions) and benefits under state paid family
and medical leave (PFML) programs [Letter to Daniel Werfel,
1-18-24 Office of Colorado Governor Jared Polis, News Release,
1-22-24]. The nine states are: Colorado, Connecticut, Maryland,
Massachusetts, Minnesota, New Jersey, New York, Oregon, and
Washington.
Need for IRS guidance
PFML programs vary by state. Some state programs are
funded by employer and employee contributions. In other
states, only employers or only employees are required to make
contributions. In some states, the employer is permitted to pay
the employee’s share of contributions.
The governors are seeking guidance on the issue of the
tax treatment of PFML premiums and benefits under state
law. According to the letter, “the most recent publicly available
guidance on this matter is the IRS’ Chief Counsel Memorandum
from 2005, which predates most state programs and is not
especially definitive.” The governors want the IRS to issue
clarifying, current guidance on how both employers and
employees should treat PFML premiums and benefits.
Impact on payroll professionals
The letter describes the uncertainty employers face
regarding the proper calculation of PFML payroll taxes and
the reporting of premiums withheld by employers from
employees. States do not have clarity on whether Forms 1099
should be issued.
Employee personal income tax questions, concerns
In particular, the letter asks for guidance on whether
taxability hinges on the taxpayer (employee) itemizing
deductions and claiming the state and local tax (SALT)
deduction, and what to do if the amount of the PFML benefits
exceed the amount of premiums paid.
According to the governors, the lack of guidance “creates
a substantial risk of an unexpected and large tax liability” for
employees “who rely on these programs to take family leave,
deal with a personal illness, or take care of vulnerable family
members.” The governors are concerned that taxing PFML
benefits would create challenges, especially for low and
moderate-income families.
Because the states cannot provide guidance on taxability
without clear federal guidance, employees are unsure as to
whether they will face a tax obligation after using the benefits,
and the tax owed could be thousands of dollars for a single
beneficiary, according to the letter.
Potential for double taxation
Many state PFML programs generally operate as social
insurance programs. This means that not allowing a deduction
for contributions and taxing benefits effectively represents
double taxation for employees, according to the letter. The
governors explain that taxation of wage replacement is
consistent with the IRS’ treatment of other programs. However,
the governors suggest that the IRS should issue clarifying
guidance that would ensure that program participants are
not taxed on both mandatory contributions paid and benefits
received. According to the letter, taxation on benefits received
makes more sense than taxation on monthly premiums, which
should not be considered taxable income.
States with PFML, SDI programs
California, Colorado, Connecticut, Delaware (effective
January 1, 2025), District of Columbia, Maine (effective January
1, 2025), Maryland (effective October 1, 2024), Massachusetts,
Minnesota (effective January 1, 2026), New Jersey, New
York, Oregon, Rhode Island, Washington, and San Francisco,
California, have established PFML programs that vary but
generally provide compensation to employees who take time
off from work to care for a seriously ill family member or to
bond with a new child. Many are administered as a part of or
in a similar manner to state disability insurance (SDI) programs,
requiring employee and/or employer contributions.
Note: California, Hawaii, New Jersey, New York, Puerto
Rico, and Rhode Island provide benefits to employees who
are temporarily disabled by an injury or illness that is not
job-related through a tax-supported state fund (workers’
compensation covers job-related injuries or illnesses). The SDI
funds operate in much the same way as state unemployment
insurance systems and under many similar rules.
Be Aware of Deadlines for State Unemployment Insurance
Voluntary Contributions
Employers in 27 states (nearly all using the reserve ratio
method of experience rating) might be able to make
voluntary contributions to their unemployment insurance
(UI) tax accounts to reduce their tax rates. Before making a
voluntary contribution, the employer must determine if the
amount of the contribution will be less than the increased
February 5, 2024 Volume 26 Issue 3
