IRS clarifies tax rules for state and DC Paid Family and Medical Leave (PFML) programs: What employers need to know
What’s new?
The IRS issued Revenue Ruling 2025-4, updated by Notice 2026-6, which explains how to handle federal taxes for contributions to — and benefits from — state and DC PFML programs. This guidance covers 14 states plus Washington, DC, where private employers must comply with PFML laws.
Key takeaways for employers:
- Employee contributions: Required employee contributions to state PFML programs are withheld after tax. These amounts are included in employees’ gross income and subject to federal income tax, Social Security, Medicare, and unemployment taxes. Employees may be able to deduct these contributions on their state income tax returns, subject to limits.
- Employer contributions: Required employer contributions are deductible as a business expense but are not included in employees’ taxable income.
- Voluntary employer contributions: If an employer chooses to pay some or all of the employee’s required contribution (called an “employer pick-up”), this amount is treated as taxable wages for the employee and subject to all applicable federal taxes.
- Benefit payments:
- Family leave benefits are taxable income but not subject to Social Security, Medicare, or unemployment tax withholding. States must issue Form 1099 for benefits over $600.
- Medical leave benefits are partially taxable depending on who paid the contributions. Benefits tied to employee contributions are generally tax-free, while those tied to employer contributions are taxable wages.
Transitional relief for 2025 and 2026
To ease the transition, the IRS is providing temporary relief from penalties for certain tax withholding and reporting requirements through 2026. However, employer pick-up contributions made in 2026 must be treated as taxable wages.
What employers should do now
- Review and update payroll systems to correctly withhold and report PFML contributions and benefits.
- Communicate clearly with employees about how PFML contributions and benefits affect their taxes.
- Train HR and payroll staff on the new rules.
- Stay alert for additional guidance from state PFML administrators and the IRS, especially if you offer private PFML plans instead of participating in state programs.
- 69% say that improving administration of FML and other leaves is a priority.
Why This Matters
With PFML programs expanding, understanding these tax rules helps employers avoid costly mistakes and ensures employees receive accurate tax information. Proper compliance also supports smooth administration of leave benefits and payroll.
For more detailed information, employers can refer to IRS Revenue Ruling 2025-4 and Notice 2026-6, or consult with tax professionals.