Navigating the maze of payroll taxes and contributions can be daunting. For small business owners across many states, understanding the tax implications of Paid Family and Medical Leave (PFML) contributions has been just another headache. This is due to the fact that, up until very recently, the IRS had not issued guidance on the taxability of PFML contributions. But don’t worry, because we are here to help you overcome this issue.
In this article, we’ll dive deep into the question, “Are PFML contributions taxable?” By the end, you’ll have a clear understanding of what’s taxable, what’s not, and how to stay compliant with federal and state tax regulations. Let’s begin!
What are PFML contributions?
Before we answer whether PFML contributions are taxable, let’s take a moment to understand what these contributions are. PFML programs are designed to provide employees with wage replacement benefits when they need to take time off for their own health conditions, to care for a family member, to bond with a new child, or another type of qualifying medical event. In order to ensure that these programs have enough funds to pay out benefits, employers and/or employees are responsible for paying a payroll tax into the program. Each state has their own unique rules on whether employers and/or employees pay this payroll tax, so be sure to check with your state for its’ rules.
Different types of contributions
Let’s differentiate between the types of payroll contributions.
- Employee Contributions: These are the payroll tax amounts withheld from an employee’s paycheck to help fund PFML benefits.
- Employer Contributions: These are the amounts that employers pay into the PFML program.
Are PFML contributions taxable?
Now, let’s look at the taxability of PFML contributions. The IRS has recently published Revenue Ruling 2025-4 to provide some guidance after many years of leaving employers in the dark. Unfortunately, the answer to this question isn’t as straightforward as one might hope. The taxability of these contributions depends on several factors, including who makes the contributions and how they are reported.
Employee contributions
Employee contributions to PFML programs are typically considered after-tax contributions. This means that the premiums withheld from an employee’s paycheck for PFML are included in the employee’s gross income and are subject to federal and state income tax withholding, Social Security, and Medicare taxes.
For example, if an employee contributes $10 per paycheck to a state PFML program, this $10 is part of the employee’s gross income and is subject to all usual payroll taxes. Then the $10 is deducted from their pay.
Employer contributions
Employer contributions to PFML programs are generally treated differently. These contributions are typically considered state excise taxes and are deductible by the employer as business expenses. Importantly, these amounts are not included in the employee’s gross income and are not subject to federal income tax withholding, Social Security, or Medicare taxes.
For instance, if an employer contributes $10 per paycheck on behalf of an employee to a state PFML program, this $10 is not included in the employee’s gross income and is not subject to payroll taxes.
Employer pick-up of employee contributions
Some state PFML programs allow for employers to pay the employee share of the payroll tax. Things get a bit more complex when an employer decides to do this. In this scenario, the amount paid by the employer is treated as additional compensation to the employee. Consequently, it is included in the employee’s gross income and is subject to federal income tax withholding, Social Security, and Medicare taxes.
Imagine an employer covering the $50 monthly contribution that an employee would have otherwise made. This $50 now becomes part of the employee’s gross income, is added to their W-2 as a taxable fringe benefit, and is treated as if the employee received it as regular wages. The employer can deduct this amount as a business expense, but it must be reported as taxable income for the employee.
Taxability of PFML benefits
While contributions have their tax nuances, the benefits paid out under PFML programs also come with their own tax considerations.
Family leave benefits
Amounts paid to employees as family leave benefits are generally included in the employee’s gross income. However, they are not considered wages for federal employment tax purposes, meaning they are not subject to FICA and FUTA taxes. These payments are typically reported on Form 1099 if they aggregate $600 or more in a taxable year.
Medical leave benefits
Medical leave benefits can be a bit trickier. If the benefits are attributable to the employee’s contributions (or employer pick-up of those contributions), they are excluded from the employee’s gross income. However, if the benefits are attributable to employer contributions, they are included in the employee’s gross income and are considered wages for federal employment tax purposes. These payments must follow the sick pay reporting rules for third-party payments.
Reporting requirements
The IRS requires that taxable amounts be accurately reflected on employees’ W-2 forms. This includes any employer-paid contributions treated as wages and any taxable benefits paid out to employees. Accurate reporting is crucial to avoid penalties and ensure compliance with federal tax regulations.
Conclusion
Understanding whether PFML contributions are taxable can be complicated, but it’s crucial for staying compliant and avoiding penalties. At Paper Trails, we’re here to help you navigate these complexities and ensure your business stays on the right track. By understanding the tax implications of PFML contributions and benefits, you can better manage your payroll and support your employees. If you have any questions or need assistance with your payroll and HR needs, don’t hesitate to reach out.
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