IRS Issues Guidance on State Paid Family and Medical Leave Tax Treatment

The IRS recently issued Revenue Ruling 2025-04 (the "Revenue Ruling") explaining the tax treatment of contributions and benefits related to state paid family and medical leave laws ("PFML.:'). The welcomed guidance provides clarity related to the federal income tax treatment of contributions, including employee deductions, and benefits for state sponsored PFML plans, as well as providing transitional relief for reporting obligations. Tax treatment for state income tax purposes is not within the scope of this guidance.

Background

In recent years, many states have enacted and continue to enact paid family and/or medical leave laws that require employees to contribute to state funds to be eligible for partial wage replacement benefits in the event of leave for certain family or medical reasons. This includes California, Colorado, Connecticut, Delaware (2025), Washington D.C., Illinois, Maine (2025), Maryland (2025), Massachusetts, Minnesota (2026), Nevada, New Hampshire (voluntary), New Jersey, New York, Oregon, Rhode Island, Vermont (voluntary), and Washington.

Some states allow employers to sponsor private benefit programs to provide the benefits required by these laws. As state PFML laws have been enacted, there have been questions about the federal income tax treatment of the contributions and benefits. The IRS has not been clear as to whether employers were required to treat the employee contributions that were deducted as pre-tax or post-tax deductions on employee pay statements and W-2s.

Revenue Ruling

The guidance details the tax treatment and reporting requirements for:

• Employee contributions;

• Employer contributions;

• Medical leave benefits; and

• Family leave benefits.