WASHINGTON, D.C. — The Internal Revenue Service (IRS) has released new guidance clarifying the federal income and employment tax treatment of contributions to, and benefits paid from, state-mandated paid family and medical leave programs. The revenue ruling, detailed in Rev. Rul. 2025-4, applies to programs administered by states and the District of Columbia and addresses reporting requirements for states, employers, and employees. This move comes in response to calls for clearer federal tax rules for such programs, which support workers dealing with personal or family medical issues.
Income and Employment Tax Scenarios
The guidance provided by the IRS explores several income and employment tax scenarios, offering insight on both contributions and benefits under state paid leave programs. Among the key points outlined are the following:
- Employer Contributions: Employers required to contribute to state programs can generally treat these contributions as an excise tax payment, making them deductible for federal tax purposes.
- Employee Contributions: Employees may deduct their contributions as state income tax payments, provided they itemize deductions and remain within the federal limitation on state tax deductions.
- Taxability of Benefits:
- Family Leave Payments: Family leave payments from state programs are fully taxable and must be included in the employee’s gross income.
- Medical Leave Payments: Payments for medical leave are subject to more nuanced rules. Benefits attributable to the employer’s portion of contributions are included in the employee’s gross income and are subject to both Social Security and Medicare taxes for both the employer and the employee. However, the portion of benefits tied to the employee’s contributions is excluded from the employee’s gross income and exempt from Social Security and Medicare taxes.
Reporting Requirements and Transition Relief
To simplify compliance, the revenue ruling also delineates reporting expectations for both employers and states administering these programs. Employers must correctly withhold and report applicable taxes on paid leave benefits.
Notably, the IRS has included a key provision for transition relief. During calendar year 2025, states, the District of Columbia, and employers are granted temporary relief from certain withholding, payment, and information reporting requirements for paid medical leave benefits. This transition period is intended to give stakeholders adequate time to adjust to the updated reporting framework.
Broad Implications for Stakeholders
The new guidance is expected to impact a wide range of parties, including state and local governments overseeing mandatory family and medical leave programs, employers facilitating contributions, and employees receiving benefits. By clarifying federal tax obligations, the IRS aims to streamline compliance for all involved while reducing administrative burdens.
This ruling underscores the growing importance of state-level leave programs as a safety net for workers balancing professional demands with health-related challenges. With clearer federal tax policies now established, the IRS has taken a critical step toward ensuring these programs operate more effectively at both the state and federal levels.
For states, employers, and taxpayers alike, the new guidance is poised to yield greater predictability and transparency in tax administration while aligning with the broader goal of supporting the financial security of the American workforce.
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