The IRS issued revenue ruling guidance to the District of Columbia and states that have mandatory paid family and medical leave (PFML) programs for employees working — and employers operating — in those states. The guidance covers the income and employment tax treatment of contributions and benefits paid under a “model” state PFML program as well as the related reporting requirements.
The guidance aims to clarify the federal tax treatment of state paid leave programs that help pay employees who cannot work because of non-occupational injuries to themselves or family members as well as sickness and disabilities.
Under the guidance, employers may generally deduct contributions to mandatory PFML programs as a payment of excise tax. Likewise, employees may deduct contributions as income tax payments if they itemize their deductions. Payments to employees from a state PFML program must be included in the employees’ gross income.
The revenue ruling is effective for payments made on or after January 1, 2025; however, the IRS is providing transition relief from certain withholding, payment and information reporting requirements for state paid medical leave benefits paid during the 2025 calendar year.
This means that 2025 will be regarded as a transition period in terms of enforcement to give states and employers time to comply with these new rules.
Employers with employees in the District of Columbia and states with mandatory PFML should consider what changes, if any, to make to their payroll or tax reporting systems. Those changes will need to be completed before the beginning of 2026 (when the transition period expires).
