The IRS has issued Revenue Ruling 2025-4 to explain the Federal income and employment tax treatment of contributions and benefits paid under state-paid family and medical leave laws.
Revenue Ruling 2025-4 provides the following guidance:
Employer contributions. The employer may deduct any required employer contributions as an excise tax. The employee does not include the employer contribution in gross income.
Employee contributions. The employer must include the employee contribution as wages in the employee’s IRS Form W-2. The employee contribution amount is included in income. However, the employee may deduct the employee contribution as a state income tax if the employee itemizes deductions.
Employer pick-up of employee contributions. The employer may deduct the pick-up payment as an ordinary and necessary business expense and must report the pick-up payment in wages on the employee’s IRS Form W-2. The employee may deduct the employer pick-up payment as a state income tax if the employee itemizes deductions.
Family leave benefits. The employee must include the amount attributable to the employer contribution (i.e., an employer contribution not previously included in the employee’s income including any employer pick-up payment) as income. This amount is not reported as wages. The state must file an IRS Form 1099 with the IRS and furnish the same to the employee.
Medical leave benefits The employee must include the amount attributable to the employer contribution (i.e., an employer contribution not previously included in the employee’s income including any employer pick-up) as income, except as otherwise provided in the rules for accident and health plans. This amount is reported wages. The sick pay reporting rules apply to these medical leave benefits. These payments are reported as third-party payments of sick pay.
Revenue Ruling 2025-4 is generally effective for payments made on or after January 1, 2025, but includes a transition period (covering all of calendar year 2025) intended to “provide States and employers time to configure their reporting and other systems and to facilitate an orderly transition to compliance.”
The Revenue Ruling can be found at: www.irs.gov/pub/irs-drop/rr-25-04.pdf