What happened?

On January 15, 2025, the IRS issued Revenue Ruling 2025-4, guiding the tax treatment and reporting of contributions to and benefits paid from state Paid Family and Medical Leave (PFML) programs.

Overview:

The guidance clarifies the federal tax treatment of state PFML programs, which support employees unable to work due to non-occupational injuries, sickness, or disabilities. It aims to ensure better compliance and understanding of tax responsibilities for both employers and employees.

• Effective Date: January 1, 2025, with transition relief for the calendar year 2025.
• The ruling does not apply to privately insured or self-insured arrangements.
• The IRS seeks comments on additional aspects of state PFML programs by April 15, 2025.

Tax Treatment and Reporting of Contributions

• Employee Contributions:
  • Included in federal gross income and considered wages.
  • Reported on Form W-2.
  • Deductible as state income tax if itemized, subject to the SALT cap of $10,000.

• Employer Contributions:
  • Not included in federal gross income.
  • Not reported on Form W-2.
  • Deductible as a business expense.

• Employer Pickups:
  • Included in federal gross income and considered wages.
  • Reported on Form W-2.
  • Deductible as state income tax if itemized, subject to the SALT cap.
  • Deductible as a business expense.

Tax Treatment and Reporting of Benefits Payments

• Family Leave Benefits:
  • Included in federal gross income.
  • Not considered wages.
  • Reported on Form 1099 by the state.

• Medical Leave Benefits:
  • Attributable to Employer Contributions: Included in federal gross income, considered wages, and classified as sick pay.
  • Attributable to Employee Contributions and Employer Pickups: Excluded from federal gross income, not considered wages, and not classified as sick pay.

Transition Relief for 2025

• Medical Leave Benefits:
  • States and employers are not required to follow third-party sick pay withholding and reporting requirements.
  • No penalties for incorrect information returns or payee statements.
  • No requirement to withhold and pay associated taxes.

Additional Details

Comparison of Existing State PFML Programs

• Funding:
  • Funded by both employee and employer contributions (e.g., Colorado, Massachusetts).
  • Funded by employee contributions only (e.g., Connecticut, California).
  • Funded by employer contributions only (e.g., Washington, D.C.).

• Wage Replacement:
  • Varies from 50% to 100%, with some using tiered formulas.
  • Maximum weekly benefits range from $941.40 (Connecticut) to $1,620 (California).

• For more details, interested parties can submit comments electronically or by mail to the IRS.
  • Electronically to the Federal eRulemaking Portal. Type IRS-2025-0012 in the search field to find the revenue ruling and submit comments.
  • By mail: 

• For more details, interested parties can submit comments electronically or by mail to the IRS.

• Electronically to the Federal eRulemaking Portal. Type IRS-2025-0012 in the search field to find the revenue ruling and submit comments.
  
  • By mail: 
    
    Internal Revenue Service
    CC:PA:LPD:RR (Revenue Ruling 2025-4)
    Room 5203
    P.O. Box 7604, Ben Franklin Station
    Washington, DC 20044

Source References

• IRS PFML States Guidance
• Rev. Rul. 2025-4 
• Federal eRulemaking Portal (Revenue Ruling 2025-4)

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