State-mandated and voluntary paid family and medical leave is on the rise. A number of states (and D.C.) have implemented paid family leave (PFL) programs, and more than one in three employers offer this benefit. To avoid payroll mishaps, employers must be able to answer: Is paid family leave taxable?
If you don’t already, you may wind up offering paid leave to your employees sooner or later. And when you do, you need to know how paid family leave taxes work.
Family and medical leave basics
Before we answer How does paid family leave affect taxes?, let’s review the difference between unpaid and paid leave.
Federal law requires certain businesses to provide unpaid family and medical leave. However, states can require businesses to provide paid family and medical leave. And, some employers voluntarily offer unpaid or paid leave.
Unpaid family and medical leave
There is no federal law that requires employers to provide paid family leave. However, there is a federal Family and Medical Leave Act (FMLA) that certain employers must follow.
FMLA covered employers must provide employees with up to 12 weeks of unpaid leave for eligible health and family reasons.
Businesses required to offer unpaid FMLA leave are those with at least 50 employees. Employees can take FMLA leave after working at a business for at least 12 months.
Under the FMLA, employees can use unpaid leave for:
- The birth, adoption, or foster care placement of a child
- The care of a spouse, child, or parent with a serious health condition
- A personal serious health condition that makes the employee unable to perform their job
- A situation that requires attention because of the military deployment of a spouse, child, or parent
If your business is exempt from the FMLA, you can still choose to offer unpaid family and medical leave.
Paid family and medical leave
Many states use FMLA rules as a guideline when creating their paid parental leave regulations. However, paid family leave rules differ from state to state. For example, states set varying reasons employees can take time off for.
PFL requires employers and/or employees to pay into a state fund. If an employee needs to take family leave, they receive a portion of their regular wages, which varies by state.
The following have state-mandated paid family and medical leave:
- Colorado (coming soon)
- New Jersey
- New York
- Oregon (coming soon)
- Rhode Island
If your business is not located in a state that mandates paid family leave, you can choose to offer it. The IRS even offers an FMLA tax credit to employers who voluntarily offer paid family leave.
Employers who provide state-mandated paid family leave must know about FMLA tax. So, is paid family leave taxable income?
Is paid family leave taxable?
If your business is subject to state-mandated paid family leave, there are two tax questions that likely come to mind:
- Are employee contributions taxable?
- Are employee PFL benefits taxable?
Find out the answer to both questions below.
Are employee contributions taxable?
Aside from Washington D.C., the current states that mandate PFL require employees to pay into the fund.
Deducting the employee’s portion before you withhold taxes means their contributions are not taxable (e.g., pre-tax deduction). Deducting the employee’s portion after you withhold taxes means their contributions are taxable (e.g., post-tax deduction).
So, which is it? Are employee PFL contributions pre-tax or post-tax deductions?
Employee PFL contributions are post-tax deductions. Their contributions are subject to taxes.
Are employee PFL benefits taxable?
If an employee takes paid family leave, are their PFL wages subject to federal income, Social Security, and Medicare taxes?
Employee PFL benefits are subject to federal income tax (aside from the disability portion of Rhode Island’s program). However, PFL benefits are not subject to Social Security and Medicare taxes. And, you do not need to pay federal unemployment (FUTA) tax on an employee’s PFL benefits.
When an employee receives PFL benefits, the payments come from the state. You do not withhold taxes on an employee’s PFL benefits because they are not included in your payroll.
State governments do not automatically withhold paid family leave federal tax from an employee’s PFL benefits. However, an employee can request to have income taxes withheld by filing Form W-4V, Voluntary Withholding Request.
What about paid family leave that’s not mandated by the state?
Voluntarily providing paid family leave to your employees is another story.
So far, the IRS has not explicitly released rules on whether PFL benefits are exempt from federal income, Social Security, Medicare, or FUTA taxes.
Regardless of whether you or a private insurance company pay out PFL benefits, Ernst and Young suggests taking a conservative approach to federal income, Social Security, and Medicare tax withholding.
What does that mean? You should plan on PFL benefits being subject to federal income, Social Security, and Medicare taxes, as well as FUTA tax.
Reporting paid family leave taxes
As an employer, you only need to worry about reporting an employee’s paid family leave contributions. Your state will handle the reporting of an employee’s PFL benefits.
Report employee contributions to state-mandated PFL on Form W-2 using Box 14, “Other.”
The State Insurance Fund reports paid family leave benefits and any federal income taxes withheld on Form 1099-G, Certain Government Payments.
Need help calculating and withholding state-mandated employee PFL contributions? Patriot Software can help. Start your self-guided demo now!
This is not intended as legal advice; for more information, please click here.