Governors Ask IRS for Guidance on Taxability of State Paid Family Leave

Nine governors signed a letter to the IRS urging clarification and guidance on the federal tax treatment of state paid family and medical leave (PFML) programs.

Currently, 13 states and the District of Columbia have PFML programs where premium contributions are collected from employers and/or employees (depending on the state). For example, the January 18 governors letter to IRS Commissioner Werfel explained that the premiums in Colorado are imposed upon the employer. The employer then has discretion to deduct some of the premium (based on the size of the employer) from the employee.

The crux of the letter noted that all state programs nonetheless must address the issue of the tax treatment of premiums and benefits under both federal and state law and that current ambiguity generates confusion. The letter pointed to a 2005 IRS Chief Counsel Memorandum as the most recent guidance on the matter available to the public.

The letter urged the IRS to issue clarifying and current guidance on how both employers and employees should treat these premium benefits as more states continue to implement similar programs. This includes whether taxability hinges on the taxpayer itemizing deductions and claiming the state and local tax (SALT) deduction and what to do if the amount of the benefit exceeds the amount of premiums paid.

Specific to payroll, the letter said that employers face uncertainty regarding the proper calculation of payroll taxes with respect to and the reporting of premiums withheld from employees. In addition, the governors said that the states themselves are left without clarity on questions such as whether 1099s should be issued.

The letter was signed by governors of the following nine states: Colorado, Connecticut, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, and Washington.

See Payroll Guide ¶19,022 for more information on state PFML programs.