The Internal Revenue Service (IRS) has issued new advice regarding the federal tax treatment of state-paid leave programs for workers who have taken time off due to illness and their employers.
Why It Matters
The update clarifies tax relief for many people across the country who are unable to work because of non-occupational injuries to themselves or their family members, as well as sickness and disabilities. According to the Bureau of Labor Statistics, in March 2023, 27 percent of civilian workers had access to paid family leave.
The guidance also comes shortly before the IRS begins accepting tax returns for 2024, with tax season opening on Monday, January 27.
What To Know
State Paid Family and Medical Leave (PFML) laws allow workers to take extended paid periods away from work to meet caregiving obligations or address serious health conditions while still receiving an income.
PFML is different from paid sick leave laws, which cover shorter illnesses or conditions, and Federal Family and Medical Leave, which is unpaid but provides job protection.
According to the new IRS guidance, issued on January 15, employers may deduct payments made toward mandatory state leave programs as an excise tax. Employees can deduct their contributions as income tax if they itemize and remain within limits set by their state.
Workers are also required to include state family leave payments and paid medical leave payments from their employer in their gross income. Similarly, an employee who receives state-paid medical leave payments must include in their gross income the portion that is funded by employer contributions. This portion is also subject to both the employer's and employee's shares of Social Security and Medicare taxes.
However, the portion of medical leave payments funded by the employee's contributions is excluded from their gross income and is not subject to Social Security or Medicare taxes, the guidance explains.
There is currently no federal law providing or guaranteeing access to paid family and medical leave for workers in the private sector. However, some states have their own paid leave programs and requirements.
The guidance does not give a list of states that have paid leave programs for family and medical reasons, but according to Investopedia, California, Colorado, Connecticut, Massachusetts, New Jersey, New York, Oregon, Rhode Island, Washington and the District of Columbia have enacted such laws.
What's Next
PFML is currently enshrined in law in nine states and Washington DC. State policies are scheduled to take effect in Minnesota, Delaware, Maine and Maryland in 2026.
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