In our recent article, we discussed how paid family and medical leave (PFML) programs have become an increasingly important compliance consideration for employers with multi-state workforces. Employers should also be aware of another developing issue: the federal tax treatment of PFML contributions and benefits.
In 2025, the IRS issued Revenue Ruling 2025-4 addressing the federal income and employment tax treatment of state PFML programs. The IRS subsequently issued Notice 2026-6, extending transition relief through 2026 while states, employers, payroll providers, and administrators adapt to the new reporting framework. Absent additional relief, these reporting requirements are expected to take effect beginning in 2027.
For employers, the most significant issue involves medical leave benefits funded by employer contributions. Under the IRS guidance, those benefits are treated as wages for federal employment tax purposes, resulting in additional withholding, employment tax, and reporting obligations. Family leave benefits are not subject to the same employment tax treatment. As a result, employers in states where employer contributions fund medical leave benefits will need to coordinate with state PFML programs and payroll providers to identify the nature of benefits paid and satisfy the related tax reporting requirements.
Some states have already responded to these concerns. Washington and Massachusetts have amended their contribution structures to allocate employer contributions to family leave benefits and employee contributions to medical leave benefits. This is a welcome change for employers, as it will reduce some of the reporting complexities created by the differing federal tax treatment of family and medical leave benefits.
As the expiration of IRS transition relief approaches, employers should review their payroll and leave administration practices to ensure they are prepared for the anticipated 2027 reporting requirements. This includes understanding how applicable state PFML programs are funded, confirming that payroll vendors are prepared for evolving reporting obligations, and evaluating whether existing processes capture the information needed to comply with future withholding and reporting requirements. The actions taken by Washington and Massachusetts are encouraging, and we are continuing to monitor whether additional states will consider similar changes before the current transition relief expires.
If you have questions regarding state paid family and medical leave programs, federal tax reporting requirements, or other employee benefits compliance matters, please contact a member of Bricker Graydon Wyatt's Employee Benefits practice group.
