Contribution Rules, Benefit Taxation, and Planning for 2027 

IRS Revenue Ruling 2025-4 established the federal tax framework for contributions and benefits under mandatory state paid family and medical leave (PFML) programs. The framework distinguishes between contributions used to fund these programs and benefits paid to employees.  

The original ruling designated calendar year 2025 as a transition period. The IRS subsequently issued notice 2026-6, extending that transition period through December 31, 2026. During the transition period participating employers have been temporarily relieved from the federal income-tax withholding and employment-tax requirements that would otherwise apply.  

Revenue Ruling 2025-4 Guidance

The following overview explains how the source of contributions and the type of leave affect federal tax treatment. 

Employer Contributions: Employer PFML contributions are generally excluded from an employee’s gross income and are not subject to FICA, FUTA, or federal income tax withholding. 

Employee Contributions: Employees generally make required PFML contributions with after-tax dollars, so these contributions do not reduce their taxable wages. If an employer pays the employee’s required share, that payment is treated as additional compensation subject to FICA, FUTA, and federal income tax withholding. 

Benefits Paid: The tax treatment of PFML benefits depends on whether the employee takes medical or family leave and whether the benefits are attributable to employer or employee contributions. Some states, including Delaware, Massachusetts, Minnesota, New Jersey, and New York, specify contribution allocations. Others do not, which may create uncertainty for employers when determining the applicable tax treatment.

Employee Takes Medical leave: 

Benefits attributable to employer contributions: These benefits are included in federal gross income as wages and treated as third party sick pay, subject to the applicable reporting rules. 

Benefits attributable to employee contributions: These benefits are excluded from federal gross income, including when an employer pays the employee’s required contribution. 

Employee Takes Family leave: 

Benefits attributable to employer contributions: These benefits are included in federal gross income but are not treated as wages. The state must report the payments to the IRS and issue a Form 1099 to the employee. 

Benefits attributable to employee contributions: The same treatment applies, including when an employer pays the employee’s required contribution. These benefits are included in federal gross income but are not treated as wages. The state must report the payments to the IRS and issue a Form 1099 to the employee.  

The central distinction is the type of leave and the source of funding. Key questions when evaluating the taxation of statutory PFML contributions and benefits are:  

1. Is it a contribution or a benefit?  

2. If a benefit, is it family leave or medical leave? 

3. If medical leave, is it attributable to employer or employee contributions?  

IRS Notice 2026-6 Relief Extension 

On December 19, 2025, the IRS issued Notice 2026-6, which extended the transition relief contained in Revenue Ruling 2025-4 through calendar year 2026. The extension specifically concerns state paid medical leave benefits attributable to employer contributions. Accordingly, 2027 is the key compliance year for the requirements covered by the extension, unless the IRS provides additional relief. 

Employer Payment of Required Employee Contributions 

If an employer voluntarily pays an amount that the employee was required to contribute, that employer’s payment is treated as additional wages to the employee. Importantly, Notice 2026-6 does not extend transition relief for these employer payments. Revenue Ruling 2025-4 provided transition relief for 2025, but that relief was not extended into 2026. Therefore, in 2026 employers have been expected to treat those amounts as federal wages and report them on the employee’s Form W-2. 

Employers Should Prepare 

For employers operating in states with medical leave components funded by employer contributions, January 1, 2027, is the planning date identified by the guidance described here, absent further IRS relief. The implications are more nuanced than a blanket statement that employers will pay FICA on PFML benefits beginning in 2027. The obligation depends on whether the benefit is for medical or family leave, and what portion of a medical benefit is attributable to employer contributions. Key employer actions are outlined below.  

For employers operating across multiple states, these distinctions are central to explaining the tax treatment accurately and separating contribution reporting obligations from benefit taxation requirements. 

Many state paid family and medical leave agencies are taking steps to prepare for implementation of this guidance. States such as Massachusetts are adjusting employee and employer contribution requirements, as well as family and medical leave benefit structures, to help reduce potential tax burdens. Other states have not yet announced their approach. As year-end approaches, employers should understand how the taxation of these benefits may affect their workforce based on each employee’s work state and be prepared to address employee questions. 

Spring Consulting Group and Alera Group are available to help employers evaluate the impact of these developments, monitor state-specific guidance, and navigate any resulting compliance or employee communication considerations.