IRS clarifies taxation of state and DC PFML contributions, benefits 

April 29, 2025

Revenue Ruling 2025-4 gives employers long-awaited guidance on the federal tax treatment of contributions and benefits mandated by state paid family and medical leave (PFML) laws. The revenue ruling also covers reporting and tax withholding requirements and provides transitional relief for 2025. The guidance does not address federal tax treatment of contributions to — or benefits from — equivalent private PFML plans (fully insured or self-insured) employers offer in lieu of participating in a state program. The ruling also does not address the state tax consequences for PFML contributions and benefits. The revenue ruling’s comment period expired on April 15, although IRS will consider comments received after that date.

While compliance with the revenue ruling’s details may prove challenging, this guidance is welcome, given the proliferation of PFML mandates in recent years. The issue had been a mainstay on the Treasury Department’s regularly updated priority guidance plan since October 2019. The revenue ruling is based on the IRS interpretation of several provisions in the Internal Revenue Code.

The revenue ruling affects 14 states (and Washington, DC) that have PFML mandates for private employers: California, Colorado, Connecticut, Delaware, Hawaii, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island and Washington. California, Hawaii, New Jersey, New York and Rhode Island started with a wage-replacement program for nonwork-related disabilities only. All but Hawaii later added a wage-replacement program for family leave, which typically includes leave for child bonding, caring for a family member with a serious health condition and handling military exigencies. The later adopters began with comprehensive PFML programs, reframing disability leave as wage replacement for workers needing time off due to a nonwork-related injury, illness or medical condition. New programs in Delaware and Maine started contribution collections earlier this year, with benefits first available in 2026. New PFML programs in Maryland and Minnesota are expected to begin in the near future. A private plan option exists in all jurisdictions except Rhode Island and Washington, DC. For more information on state PFML laws, see 2025 state paid family and medical leave contributions and benefits (Jan. 29, 2025).

The revenue ruling is not instructive for employers subject to Hawaii’s temporary disability insurance (TDI) requirement because Hawaii does not have a state plan (meaning compliance with the law requires a private plan). IRS clarification of this point would be beneficial.

The revenue ruling does, however, appear to affect two states (New Hampshire and Vermont) with PFML mandates applicable only to state governments. Both programs have a voluntary opt-in for private-sector employers (and local government employers). Application of the revenue ruling to those voluntary private employers is unclear. IRS guidance on this would be helpful.

Puerto Rico also has a paid disability program (known as SINOT), but those benefits are subject to a different tax code; the revenue ruling does not apply there. For details, see Puerto Rico’s benefit and leave laws sometimes differ from others (Aug. 12, 2024).

For simplicity purposes, references to “state” throughout this article include Washington, DC.

Download the 12-page print-friendly GRIST for details. Topics covered include the revenue ruling’s guidance on contributions and benefits, the limited transitional relief for 2025, and suggested employer actions. Two tables summarize the federal tax rules for PFML benefits and contributions, while a third table summarizes state tax guidance.