In January, the IRS provided guidance on the taxability of benefits received from state Paid Family Medical Leave programs for the first time. Prior to this, there was no clear advice available, and with each state’s program being slightly different it wasn’t always easy to determine the correct tax treatment, or even which piece of advice might be the most appropriate for the plan in your state. Even the states themselves were left guessing as to their reporting requirements for when to issue 1099s.
With Revenue Ruling 2025-04, there is finally some clarity. The basics:
- Employers can deduct their contributions to PFML plans as business expenses.
- Employees can deduct their contributions to the plans as part of their State and Local Taxes deduction on Schedule A, if they itemize (and do not exceed the cap on that deduction).
- Employees include ALL amounts paid as Family Leave benefits in their gross income for the year on their tax return. These are not wages for federal employment tax purposes.
- Employees include Medical Leave benefits in their gross income ONLY when the contributions to the plan were not included in the employee’s gross wages, or were directly paid by the employee.
Looking at the above, it seems clear the first important question is to distinguish between Family Leave benefits and Medical Leave benefits. To be considered Medical Leave, the time off from work must relate to the employee’s own serious health condition. Any time off work under a PFML plan that is used to care for someone else, to bond with a new child, or any qualifying event other than your own injury or illness is considered Family Leave.
So far, so good. And Family Leave seems pretty straightforward – the benefits are considered income and you will report them on your tax return. But what about Medical Leave? When would those benefits be taxable?
The short answer is if your employer pays the premiums and doesn’t include them as part of your wages for the year. But how to determine if that’s the case? Ideally, that information would be shown on your paystub (and possibly your W2, but the paystub is the safer bet). When in doubt, the payroll department at your job should be able to provide the info for you.
Now, what if both you and your employer make contributions to the plan? In this scenario, you’re looking at a mix of taxable and non-taxable benefits. And figuring out exactly what amount is taxable could potentially be quite a headache. Each state’s plan is different, so let’s use the local plan here in Washington as an example.
In Washington, the PFML program includes both Employer and Employee contributions to the plan. The proportion of Employer to Employee contributions is first determined by the size of the company:
Businesses with fewer than 50 employees are not required to pay the employer portion of the premium. I suppose it is possible there is a business somewhere in Washington that decided to pay an optional tax that isn’t required and provides no additional benefit to the business or the employees, but let’s assume if you work for a small employer, 100% of your contributions to the plan were employee contributions. (Remember to confirm with your employer just in case!) Congratulations, your Medical Leave benefits are not taxable.
For Employers with 50 or more employees, the premiums are 0.92% of each employee’s gross wages (not including tips), up to the Social Security cap. The breakdown for 2025 is Employers pay 28.48% of the total, and Employees pay 71.52%. This suggests that 28.48% of your medical benefits would be taxable income. But Wait! That’s not the whole story. If you dig a little deeper into the calculation of premiums, it turns out that Family Leave premiums and Medical Leave premiums are not divided equally, even though they are paid together as part of the same tax return filed with Employment Security. In fact, the Family Leave portion of the premium comes entirely out of the Employee share. The Family Leave portion accounts for 48.22% of the total premium per employee, with the remaining 51.88% considered Medical Leave.
We don’t really care about the Family Leave portion for our purposes here (it’s always taxable income), but suddenly the amount of Medical Leave benefits that are taxable just got larger. Instead of paying 28.48% of Medical Leave premiums, large employers in Washington are actually paying 55.00%!! That means 55% of Medical Leave benefits paid under this program should be considered part of a taxpayer’s gross income.
Confused yet? Me too. And since each state’s program is different, there are likely to be all sorts of strange quirks and unintended consequences depending on where you live. There is some hope: The IRS is treating 2025 as a grace period for reporting and enforcement of these rules, but starting in 2026 the states will hopefully be able to sort all this out and issue you a 1099 for the correct taxable amount of your benefits. Anything is possible.
www.irs.gov/pub/irs-drop/rr-25-04.pdf
www.paidleave.wa.gov/estimate-your-paid-leave-payments/
www.paidleave.wa.gov/app/uploads/2021/12/Employer-Wage-Reporting-and-Premiums-Toolkit-Version-21.1.pdf