Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
The IRS’s recently released Revenue Ruling 2025-4 provides significant guidance on the employment tax treatment of contributions to and benefits paid under state paid family and medical leave (PFML) programs. This has been an area of concern as states have enacted various paid leave laws without providing guidance about how to tax such benefits. The revenue ruling clarifies key points and highlights important distinctions among the treatment of contributions and benefits for FICA, FUTA, and income tax withholding purposes. These distinctions are significant for employers and require careful attention to ensure compliance with federal tax and reporting requirements.
Overview of the Ruling
Rev. Rul. 2025-4 clarifies how contributions and benefits under state PFML programs interact with federal employment taxes:
Contributions to PFML Programs
Employer Contributions: Contributions made by employers to a state PFML program are generally excluded from an employee’s gross income and are not subject to FICA, FUTA, or federal income tax withholding.
Employee Contributions: Contributions made by employees are treated as after-tax contributions. If the employer provides an employee’s required contribution for the employee, the amount is treated as additional compensation to the employee and is subject to FICA, FUTA, and income tax withholding.
Benefit Paid Under PFML Programs
Benefits that replace wages during an employee’s leave are considered wages for employment tax purposes. They are subject to FICA, FUTA, and income tax withholding unless the payment qualifies for exclusion under accident or health plan rules (e.g., payments for medical reasons under IRC § 105). Thus, the tax implications of such benefits can differ depending upon whether the payment is for family leave or medical leave.
Third-party payments of sick pay, as defined under IRC § 3402(o), are generally not considered wages unless employees voluntarily request withholding.
The following summary table of these provisions is contained in the Revenue Ruling:
|
Types of benefits |
Amount attributable to employer contribution |
Amount attributable to employee contribution |
|
Family leave benefits |
Employee must include the amount attributable to the employer contribution in employee’s Federal gross income (employer contribution not previously included in employee’s Federal gross income). This amount is not wages. State must file with the IRS and furnish to employee a Form 1099 to report these payments. |
Employee must include the amount attributable to the employee contribution, as well as to any employer pick-up of the employer pick-up of the employee contribution, in employee’s Federal gross income. This amount is not wages. State must file with the IRS and furnish to employee a Form 1099 to report these payments. |
|
Medical leave benefits |
Employee must include the amount attributable to the employer contribution in employee’s Federal gross income (employer contribution not previously included in employee’s Federal gross income) except as otherwise provided in § 105. This amount is wages. The sick pay reporting rules apply to the medical leave benefits attributable to employer contributions. These payments are third-party payments (by a party that is not an agent of the employer) of sick pay |
The amount attributable to the employee contribution, as well as to any employer pick-up of the employee contribution, are excluded from employee’s Federal gross income. |
Reporting Requirements
The ruling underscores that taxable amounts must be accurately reflected on an employee’s W-2 forms, including employer-paid contributions treated as wages and taxable benefits paid to employees.
Key Takeaways
Rev. Rul. 2025-4 demonstrates how critical it is for employers to understand the employment tax implications of contributions to and benefits paid under state PFML programs. Wage-replacement benefits are generally subject to FICA, FUTA, and income tax withholding, except where specific exclusions apply, such as for payments made under accident or health plan rules. Employers should also account for the treatment of employee contributions; if an employer covers an employee’s required contribution, it is considered additional compensation and subject to employment taxes.
The ruling places an administrative burden on employers to distinguish between taxable and non-taxable contributions and benefits. It is critical that employers update payroll systems to ensure proper withholding and reporting, particularly for taxable benefits and employer-paid contributions treated as wages. Accurate reporting on W-2 forms will be important to avoid penalties, requiring coordination between payroll, human resources, and legal teams to ensure compliance. It is recommended that employers proactively review their practices to align with the ruling and ensure adherence to federal tax requirements.
