© 2025 American Payroll Institute, Inc.
February 10, 2025 Volume 27 Issue 3
IRS Issues Guidance on State Family and Medical Leave Programs
The IRS issued guidance for the federal income and
employment tax treatment of contributions and
benefits paid in certain situations under state paid family
and medical leave (PFML) programs, along with the related
reporting requirements. Last year, governors from nine
states asked the IRS for guidance (Colorado, Connecticut,
Maryland, Massachusetts, Minnesota, New Jersey, New York,
Oregon, and Washington see PAYSTATE UPDATE, Issue 3, Vol.
26) [IRS, Rev. Rul. 2025-4, 1-15-25].
Employee contributions to state PFML programs
The IRS considers mandatory employee contributions
that the employer withholds from the employee’s wages
and remits to the state to be state income tax payments.
Therefore, employees may deduct these amounts on
their personal income tax returns for the taxable year in
which such taxes are withheld by the employer, subject to
certain limitations regarding deductions. The contribution
amounts are included in the employee’s gross income,
and the employer must report these amounts on the
employee’s Form W-2, Wage and Tax Statement.
Employer contributions to state PFML programs
Mandatory employer contributions required to be paid
from the employer’s own funds are considered employer
payments of state excise tax. Therefore, the employer may
deduct these amounts as taxes incurred in carrying on
a trade or business in the taxable year they are paid for
corporate tax purposes. These amounts are not included in
the federal gross income of the employee.
State PFML benefits paid to the employee
Family leave benefit payments are included in
the federal gross income of the employee, but are not
considered wages for federal employment tax purposes.
Medical leave benefits paid to the employee that are
attributable to the employee’s contributions are excluded
from the employee’s gross income and are not considered
wages for federal employment tax purposes. These
payments are also not considered sick pay.
Medical leave benefits paid to the employee that are
attributable to the employer’s contribution are included
as gross income and are considered wages, similar to
disability leave benefit payments for federal employment
tax purposes and are considered third-party payments of
sick pay.
The amount attributable to an employee’s or employer’s
contribution would be based on the percentage paid. If the
employer and employee each pay 50% of the contribution,
50% of the benefit payment would be attributable to the
employee and 50% would be attributable to the employer.
Voluntary employer payments covering employees’
portion of contributions
Some state laws allow employers to cover all or
a portion of the employee’s portion of contributions to
the state PFML program. The IRS refers to this as an
employer “pick-up.” Where an employer covers all or part
of the employee’s contribution, the family leave benefit
attributable to the employer pick-up is included in the
employee’s federal gross income, but is not considered
wages for federal employment tax purposes.
Where an employer covers all or part of the employee’s
contribution, the medical leave benefit amounts
attributable to the employer pick-up are excluded from the
employee’s gross income and are not considered sick pay or
wages for federal employment tax purposes.
Effective date
The guidance has an effective date of January 1,
2025, but calendar year 2025 will be a transition period for
enforcement and administration.
For calendar year 2025, with respect to the portion
of medical leave benefits attributable to employer
contributions, an employer is not required to follow the
federal income tax withholding and reporting requirements
applicable to third-party sick pay and will not be liable for
failure to file the correct corresponding returns.
For calendar year 2025, an employer is not required to
treat amounts the employer voluntarily pays from its own
funds or any part of an employee’s required contribution to
a state PFML program as wages for federal employment tax
purposes.
States with PFML, SDI programs
California, Colorado, Connecticut, Delaware, District
of Columbia, Maine, Maryland (effective July 1, 2025),
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.
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.
February 10, 2025 Volume 27 Issue 3
IRS Issues Guidance on State Family and Medical Leave Programs
The IRS issued guidance for the federal income and
employment tax treatment of contributions and
benefits paid in certain situations under state paid family
and medical leave (PFML) programs, along with the related
reporting requirements. Last year, governors from nine
states asked the IRS for guidance (Colorado, Connecticut,
Maryland, Massachusetts, Minnesota, New Jersey, New York,
Oregon, and Washington see PAYSTATE UPDATE, Issue 3, Vol.
26) [IRS, Rev. Rul. 2025-4, 1-15-25].
Employee contributions to state PFML programs
The IRS considers mandatory employee contributions
that the employer withholds from the employee’s wages
and remits to the state to be state income tax payments.
Therefore, employees may deduct these amounts on
their personal income tax returns for the taxable year in
which such taxes are withheld by the employer, subject to
certain limitations regarding deductions. The contribution
amounts are included in the employee’s gross income,
and the employer must report these amounts on the
employee’s Form W-2, Wage and Tax Statement.
Employer contributions to state PFML programs
Mandatory employer contributions required to be paid
from the employer’s own funds are considered employer
payments of state excise tax. Therefore, the employer may
deduct these amounts as taxes incurred in carrying on
a trade or business in the taxable year they are paid for
corporate tax purposes. These amounts are not included in
the federal gross income of the employee.
State PFML benefits paid to the employee
Family leave benefit payments are included in
the federal gross income of the employee, but are not
considered wages for federal employment tax purposes.
Medical leave benefits paid to the employee that are
attributable to the employee’s contributions are excluded
from the employee’s gross income and are not considered
wages for federal employment tax purposes. These
payments are also not considered sick pay.
Medical leave benefits paid to the employee that are
attributable to the employer’s contribution are included
as gross income and are considered wages, similar to
disability leave benefit payments for federal employment
tax purposes and are considered third-party payments of
sick pay.
The amount attributable to an employee’s or employer’s
contribution would be based on the percentage paid. If the
employer and employee each pay 50% of the contribution,
50% of the benefit payment would be attributable to the
employee and 50% would be attributable to the employer.
Voluntary employer payments covering employees’
portion of contributions
Some state laws allow employers to cover all or
a portion of the employee’s portion of contributions to
the state PFML program. The IRS refers to this as an
employer “pick-up.” Where an employer covers all or part
of the employee’s contribution, the family leave benefit
attributable to the employer pick-up is included in the
employee’s federal gross income, but is not considered
wages for federal employment tax purposes.
Where an employer covers all or part of the employee’s
contribution, the medical leave benefit amounts
attributable to the employer pick-up are excluded from the
employee’s gross income and are not considered sick pay or
wages for federal employment tax purposes.
Effective date
The guidance has an effective date of January 1,
2025, but calendar year 2025 will be a transition period for
enforcement and administration.
For calendar year 2025, with respect to the portion
of medical leave benefits attributable to employer
contributions, an employer is not required to follow the
federal income tax withholding and reporting requirements
applicable to third-party sick pay and will not be liable for
failure to file the correct corresponding returns.
For calendar year 2025, an employer is not required to
treat amounts the employer voluntarily pays from its own
funds or any part of an employee’s required contribution to
a state PFML program as wages for federal employment tax
purposes.
States with PFML, SDI programs
California, Colorado, Connecticut, Delaware, District
of Columbia, Maine, Maryland (effective July 1, 2025),
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.
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.
