Paid Family Leave Is Taxable
The New York State Department of Taxation and Finance provided guidance regarding the tax treatment of deductions from employee wages used to finance paid family leave premiums, and the tax treatment of Paid Family Leave (PFL) benefits to be received by eligible employees.
Background: Paid Family Leave Benefits, available to employees as of January 1, 2018, may be financed by deductions from wages under a formula set by the New York State Superintendent of Finance. Employers were permitted, but not required, to begin taking deductions from employee wages shortly thereafter.
If you are an employer subject to state-mandated paid family leave, you were probably wondering if employee contributions are taxable? The current states that mandate PFL (except for Washington D.C.) require employees to pay into the fund.
- Deducting the employee’s portion before withholding taxes means their contributions are not taxable (e.g., pre-tax deduction).
- Deducting the employee’s portion after withholding 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?
After reviewing the paid family leave statute, the final regulations, applicable laws, case law and federal guidance, and after consulting with the Internal Revenue Service, the DOTF issued guidance stating essentially that employee PFL contributions are post-tax deductions, therefore their contributions are subject to taxes. Guidance for employers below:
- Premiums are to be deducted from employee's after-tax wages.
- Paid Family Leave Benefits paid to employees will be taxable, non-wage income that must be included in federal gross income.
- Taxes will not automatically be withheld from benefits. Employers should report employee contributions on an IRS Form W-2 using Box 14, State disability taxes withheld.
- Paid Family Leave Benefits should be reported by the New York State Insurance Fund (NYSIF) on IRS Form 1099-G and by all other payers (either private carriers or self-insured employers) on IRS Form 1099-Misc.
If you are an employee receiving PFL benefits, be aware the payments come from the state. If your employer participates in New York State’s Paid Family Leave program, you need to know the following:
- Any benefits you receive under this program are taxable and included in your federal gross income. However, PFL benefits are not subject to Social Security and Medicare taxes, or federal unemployment (FUTA) tax.
- Employers do not withhold taxes on an employee’s PFL benefits because they are not included in payroll. State governments do not automatically withhold paid family leave federal tax from an employee’s PFL benefits.
- An employee can request to have income taxes withheld by filing Form W-4V, Voluntary Withholding Request.
- You will receive either Form 1099-G or Form 1099-MISC from your employer showing your taxable benefits.
- Your employer will deduct premiums for the Paid Family Leave program from your after-tax wages.
- Your premium contributions will be reported to you by your employer on Form W-2 in Box 14 as state disability insurance taxes withheld.