IRS Clarifies Tax Treatment of State-Level Paid Family and Medical Leave Programs

Many states have developed their own state paid family and medical leave programs (PFML programs).  That raised questions over how these programs are treated for employment tax purposes.  In Revenue Ruling 2025-4, the IRS clarified that employer contributions to state PFML programs are excluded from employees' income and not subject to FICA, FUTA or federal tax withholding.  Employer contributions are treated as after-tax contributions.  However, if the employer makes the employee's required contribution on their behalf, that contribution is included in the employee's compensation and subject to FICA, FUTA and federal tax withholding.  When employees actually receive benefits under the state PFML programs, they are treated as compensation to the extent they are designed to replace the employee's wages (unless the amounts qualify for exclusion based on the rules governing accident and health plans, meaning that they're paid for medical reasons).  Importantly, the tax treatment of benefits will vary depending on whether they are paid for family or medical reasons.  For more information on paid family and medical leave, visit Tax Facts Online. Read More: Link to Q3511.  Note: Q is updated.