The IRS has issued Revenue Ruling 2025-4, providing clarity on how state-mandated Paid Family and Medical Leave (PFML) programs should be taxed. If you’re an employer making payroll decisions or an employee wondering what this means for your paycheck, here’s what you need to know—and what you need to do.

 

For Employers: Key Takeaways and Actions

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• Employer contributions are deductible – Your mandatory contributions to a state PFML fund are considered excise taxes and can be deducted as a business expense. Action: Make sure your payroll system accounts for this deduction.
• Employee contributions are taxable wages – Any required payroll deductions from employees count as taxable wages and must be included on Form W-2. Action: Ensure your payroll provider correctly reports these contributions.
• Employer-paid employee contributions are additional wages – If you voluntarily cover part of your employees’ required contributions, this is taxable income for the employee and must be reported as wages. Action: Decide whether to offer this benefit and ensure proper tax reporting.
• Medical leave benefits have special tax rules – If an employee receives state-paid medical leave benefits, part may be taxable and reportable on Form W-2. Action: Work with your payroll provider to ensure compliance with reporting rules.
• Family leave benefits are taxable – State-paid family leave benefits are fully taxable and must be reported on Form 1099. Action: Inform employees that these benefits will be taxed.

 

For Employees: Key Takeaways and Actions

 

• Your PFML contributions are taxable – If your paycheck shows deductions for a state PFML program, that money is taxed as part of your wages. Action: Expect to see this on your W-2 and plan accordingly.
• You may be able to deduct contributions – You can claim these payments as state income tax deductions on Schedule A, but only if you itemize—and only up to the $10,000 SALT cap. Action: Talk to your tax preparer to see if this deduction benefits you.
• Employer “pick-ups” are taxable – If your employer voluntarily pays part of your required contributions, it counts as taxable income, even though you don’t see the money directly. Action: Be aware that this may slightly increase your taxable income.
• State-paid family leave benefits are taxable – If you receive family leave benefits, expect to get a Form 1099—and be prepared to pay taxes on it. Action: Set aside money to cover potential tax liability when receiving benefits.
• State-paid medical leave benefits may be partially taxable – If you take medical leave, benefits from your contributions are not taxable, but benefits from your employer’s contributions are taxable. Action: Keep track of how much of your benefits might be taxed.

 

Next Steps

 

• Employers – Ensure payroll is set up to handle reporting correctly, decide whether to cover employee contributions, and educate employees on the tax implications.
• Employees – Check your paystub for PFML deductions, plan for potential tax liabilities, and talk to a tax professional about possible deductions.

 

State of Maryland Update

 

Maryland's implementation of its Paid Family and Medical Leave Insurance (FAMLI) program has been delayed, with payroll contributions now scheduled to begin on January 1, 2027, and benefits becoming available by January 3, 2028. This postponement stems from significant economic uncertainties, including a $3 billion state budget shortfall and federal policy changes impacting Maryland's workforce. The Maryland Department of Labor emphasized the need for additional time to develop robust digital infrastructure, secure sustainable financial systems, and enhance awareness among employers and workers across the state. The delay aims to ensure a smooth and effective rollout of the program, providing critical support for employees of federal agencies, organizations reliant on federal funding, and affected employers and employees in the private sector.

 

Whether you’re paying into the system or receiving benefits, state PFML programs come with tax consequences. Plan ahead now to avoid surprises later.