Is Paid Family Leave Taxable?

What are the differences between paid and unpaid family leave?

While there is no federal law requiring employers to pay for family leave, certain employers do have to follow the Family and Medical Leave Act (FMLA). 

Employees can use their unpaid leave for:

• The birth, adoption, or foster care placement of a child
• The care of a spouse, child, or parent with a serious health condition
• A personal serious health condition that makes the employee unable to perform their job or telwork
• A situation that requires attention because of the military deployment of a spouse, child, or parent

If an employer chooses to offer PFL, they will be entitled to claim a fully refundable tax credit up to 100% of the family leave wages and allocatable qualified health plan expenses and the eligible share of medicare tax on the qualified family leave wages it pays.

An eligible employer (that has a written policy in place) uses Form 8994 to figure the employer credit for paid family and medical leave. The credit ranges from 12.5% to 25% of certain wages paid to a qualifying employee while the employee is on family and medical leave. You can claim or elect not to claim the employer credit for paid family and medical leave any time within 3 years from the due date of your return on either your original return or an amended return.

For an employer to be eligible to claim the credit, the employer’s written policy must meet certain minimum requirements with respect to paid family and medical leave.

These requirements are:

• The policy must provide at least 2 weeks of annual paid family and medical leave to all qualifying employees who aren’t part-time employees, and at least a proportionate amount of paid family and medical leave to qualifying employees who are part-time employees;

• The policy must require a rate of payment that isn’t less than 50% of the wages normally paid to the qualifying employee for services performed for the employer;

and • If the employer employs one or more qualifying employees who aren’t covered by title I of the FMLA, the employer’s written policy must also include the “noninterference” language.

Employee PFL contributions are post-tax deductions, which means the contributions made into the state fund are subject to taxes.

If an employee takes PFL, the wages they receive are subject to federal income tax, but not Social Security and Medicare taxes, or federal unemployment tax. The employee will receive a 1099-G, which will need to be added to their annual 1040 if the employee claims for the state PFL benefits.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.