Understanding 2025 IRS Guidance on Paid Family and Medical Leave (PFML) Taxes

USTAX BAY
Jul 24
2 min read

As we enter 2025, businesses and HR professionals must stay updated with the latest IRS guidelines—especially regarding the taxation of state Paid Family and Medical Leave (PFML) programs. The IRS has clarified how both employers and employees should handle tax reporting and withholding for PFML benefits.

What’s New?

If your state provides PFML benefits directly to employees or mandates participation in a state-administered plan, the IRS has confirmed that these payments are generally considered taxable income for federal purposes.

This means:

Employees must report these benefits as income on their federal tax returns.
Employers may be required to withhold federal income tax from employee contributions, depending on the program's structure.
Self-employed individuals participating in state PFML programs must include any benefits received as income on their federal return.

What Employers Need to Do

Businesses operating in states with mandatory PFML programs should:

Review Payroll Systems – Make sure your payroll software correctly categorizes employee contributions and employer-funded premiums.
Update Tax Reporting – Wages paid under a PFML program should be reported as income, where applicable.
Communicate With Employees – Inform workers that PFML benefits may be subject to federal tax.

Examples of Affected States

If you have employees in states like California, Colorado, Massachusetts, New Jersey, New York, Oregon, or Washington, these updates likely apply to you.

Why It Matters

Incorrect tax reporting can result in penalties or compliance issues. As these programs grow in popularity, so does the need to handle them correctly.

Need Help Navigating State Payroll Taxes and PFML Compliance?

At U.S. Tax Bay, we help businesses across all 50 states stay compliant with payroll tax obligations—from PFML to SUI, SIT, 940/941 filings, and more. Whether you're using ADP, Gusto, QuickBooks, or Zenefits, we’ve got your payroll covered.

👉 Ready to simplify your payroll? Visit www.ustaxbay.com today.