New IRS Guidance on Paid Family and Medical Leave Programs
The IRS recently issued Revenue Ruling 2025-4, which provides clarity on the income and employment tax treatment of contributions and benefits under state-mandated paid family and medical leave programs. This guidance, released on January 15, 2025, aims to address questions raised by employees and employers in states offering these benefits.
The new rules apply to states and the District of Columbia with mandatory paid leave programs. They also affect employers operating in those regions and employees receiving benefits under these programs.
Key Tax Treatment Scenarios
Rev. Rul. 2025-4 outlines several important tax scenarios related to state-paid leave contributions and benefits:
- Employer Contributions
- Employers can deduct contributions to mandatory paid family and medical leave programs as excise tax payments on their federal tax returns.
- Employee Contributions
- Employees may deduct their contributions as state income tax payments, but only if they itemize deductions. The deduction is subject to the state income tax deduction limitation.
- Paid Family Leave Benefits
- Employees receiving state-paid family leave benefits must include these amounts in their gross income for federal tax purposes.
- Paid Medical Leave Benefits
- Benefits attributable to the employer’s contributions are subject to federal income tax, as well as Social Security and Medicare taxes.
- Benefits from the employee’s portion of contributions are excluded from federal gross income and are not subject to Social Security or Medicare taxes.
Transition Relief for Employers and States
The ruling offers transition relief for states, the District of Columbia, and employers from specific tax withholding, payment, and information reporting requirements for state-paid medical leave benefits made during calendar year 2025.
Impact on Stakeholders
This guidance will affect:
- State and Local Governments: Responsible for administering paid leave programs and ensuring compliance with federal tax rules.
- Employers: Must adhere to the new tax treatment rules and adjust payroll systems to ensure proper withholding and reporting.
- Employees: Need to understand how benefits received will affect their federal tax filings.
IRS Seeks Public Comments
The IRS is encouraging stakeholders to submit comments on aspects of state-paid family and medical leave programs not covered by this ruling. Interested parties can submit comments via the Federal eRulemaking Portal at regulations.gov by searching for IRS-2025-0012 or by mailing comments to:
Internal Revenue Service
CC:PA:LPD:PR (Revenue Ruling 2025-4)
Room 5203, P.O. Box 7604
Ben Franklin Station, Washington, D.C., 20044
Navigating the Changes
Taxpayers and businesses should review the guidance carefully to ensure compliance and maximize available deductions. Employers may need to consult payroll and tax professionals to implement the necessary changes.
For more details, visit the IRS website or consult a tax professional familiar with federal and state tax laws.
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