By Mark Adams
For years, employers in states with paid family and medical leave programs have faced a surprisingly basic question: how should contributions and benefits be treated for federal tax purposes? The IRS addressed that question on January 15, 2025, when it issued Revenue Ruling 2025-4. Since then, states have been working through what the ruling means for their programs. On December 19, 2025, the IRS issued Notice 2026-6, which gave states and employers an additional year of transition relief for certain requirements.
Below is a look at the federal rules, how Massachusetts, Connecticut, Rhode Island, Maine, and New York are responding, and what employers should be thinking about now. Massachusetts deserves particular attention because the Commonwealth has changed its PFML contribution structure beginning in 2027 in response to the federal tax treatment.
What Revenue Ruling 2025-4 means
Revenue Ruling 2025-4 addresses the federal income and employment tax treatment of contributions to, and benefits paid through, state-run PFML programs. Although the ruling walks through several different scenarios, the practical rules for employers can be summarized as follows:
- Mandatory employer contributions are deductible by the employer as a state excise tax and are not included in the employee’s income.
- Mandatory employee contributions withheld from payroll are treated as the employee’s payment of state income tax (potentially deductible under Section 164, subject to the SALT cap), and must be included in the employee’s wages on Form W-2.
- Employer “pick-up” contributions — where an employer voluntarily pays part of an employee’s required contribution — are treated as additional taxable compensation to the employee, reportable on Form W-2, deductible by the employer as a business expense.
- Family leave benefits (bonding, caregiving, military exigency) are always included in the employee’s federal gross income, but are not wages for employment tax purposes; the state must report them on Form 1099 (a dedicated Box 10 was added to the redesigned Form 1099-G for this purpose).
- Medical leave benefits are split based on funding source: the portion attributable to the employee’s own contributions is excluded from income, while the portion attributable to employer contributions is taxable, treated as wages for FICA/FUTA purposes, and treated as third-party sick pay subject to the reporting rules under Section 3402(o).
The ruling applies to payments made on or after January 1, 2025. The IRS initially provided transition relief for 2025, during which states and employers would not be penalized for failing to apply certain withholding and reporting requirements to medical leave benefits. Notice 2026-6 extended that relief through calendar year 2026, but only for the portion of medical leave benefits attributable to employer contributions. The extension does not apply to employer pick-up contributions. Beginning with 2026 payments, an employer that voluntarily pays an employee’s required contribution must treat that amount as wages and report it on Form W-2.
Massachusetts
Massachusetts has taken the most significant action in response to the IRS ruling. Throughout 2025, the Department of Family and Medical Leave (DFML) provided employers with guidance on the new federal tax treatment. After the IRS issued Notice 2026-6, DFML announced that it would postpone certain withholding and reporting requirements for another year. For calendar year 2026:
- Medical leave benefits will not be treated as third-party sick pay, and there are no new employer withholding or reporting obligations, and no change to employer FICA/FUTA responsibility, for PFML benefits.
- Employees may still elect voluntary federal and state withholding on taxable benefits.
- For employers with 25 or more employees, 60% of medical leave benefits paid to employees is treated as taxable (reflecting the employer’s share of contributions); DFML — not the employer — reports that taxable amount to employees on Form 1099-G.
- Medical leave benefits paid to employees of employers with fewer than 25 employees are not taxable at all.
- 100% of family leave benefits remain taxable and are reported by DFML on Form 1099-G.
Massachusetts has also gone a step further by changing how the PFML program will be funded beginning in 2027. On June 12, 2026, Governor Healey signed Chapter 101 of the Acts of 2026. Beginning January 1, 2027, employers with 25 or more covered individuals will no longer make an employer contribution toward the medical leave portion of PFML. Instead, the required employer contribution will be shifted to the family leave portion of the program. This matters because, under the IRS ruling, medical leave benefits are taxable as wages only to the extent they are attributable to employer contributions. By eliminating the employer contribution to medical leave, Massachusetts is effectively removing that taxable employer-funded portion of the medical leave benefit. DFML has specifically identified the change as a way to reduce the impact of the federal tax guidance. Family leave benefits are already taxable to employees regardless of who funds the contribution, so shifting the employer contribution to that side of the program does not create the same issue.
For employers with fewer than 25 covered individuals, the change has little practical effect because employees already fund the full medical leave contribution. The law also does not eliminate or reduce the overall PFML contribution obligation for larger employers; it changes how the contribution is divided between medical and family leave. The 2027 total contribution rate has not yet been announced. DFML is expected to publish the rate and the medical/family allocation by October 1, 2026. Employers with 25 or more covered individuals should be prepared to review their payroll configuration, work with their payroll providers, and update employee PFML notices before the January 1, 2027 effective date.
Connecticut
Connecticut Paid Leave is funded entirely through employee contributions at a rate of 0.5% of wages. Employers are not required to contribute, although an employer may choose to pay some or all of the employee contribution. That distinction is important under Revenue Ruling 2025-4. Because the program does not require an employer contribution, medical leave benefits generally do not include an employer-funded portion that would be treated as taxable sick pay under the ruling.
For that reason, Connecticut has not faced the same need to restructure its program as Massachusetts. There is no mandatory employer-funded medical leave contribution to move elsewhere.
Rhode Island
Rhode Island’s Temporary Disability Insurance (TDI) and Temporary Caregiver Insurance (TCI) programs are funded entirely through employee payroll contributions. There is no required employer contribution. As a result, TDI benefits, which cover an employee’s own disability, are not treated as taxable based on an employer-funded contribution, and the state does not issue a Form 1099-G for those benefits. TCI benefits are different. Because TCI provides family leave benefits, those benefits are taxable under the IRS rule regardless of the source of the contribution, and the state issues a Form 1099-G.
Maine
Maine began collecting PFML contributions in 2025, with benefits becoming available in May 2026. As a result, the state has had to address the IRS guidance while implementing the program. Maine’s contribution requirements depend on employer size. Employers with 15 or more employees are subject to a 1% contribution and may deduct up to half of that amount from employees. Employers with fewer than 15 employees are subject to a reduced 0.5% contribution, which may be funded entirely through employee withholding.
The Maine Department of Labor has structured its guidance around the IRS rules. For an employee working for an employer with fewer than 15 employees, where the entire contribution may be employee-funded, the employee’s medical leave benefit is not taxable on account of an employer contribution. For employers with 15 or more employees, approximately half of the medical leave benefit is taxable, reflecting the employer’s minimum required share of the contribution. Family leave benefits are fully taxable but are not treated as wages. The state issues Form 1099-G, and claimants may elect voluntary withholding.
Maine has not changed its contribution structure in the way Massachusetts has. Because employers with 15 or more employees must fund part of the contribution, some medical leave benefits remain subject to the tax treatment described in the IRS ruling. For now, Maine is addressing the issue through Department of Labor guidance rather than a statutory change.
New York
New York has two related programs. Paid Family Leave (PFL) covers bonding, family caregiving, and qualifying military-related leave, while the Disability Benefits Law (DBL) provides benefits for an employee’s own non-occupational illness or injury. PFL is funded through employee payroll deductions—0.432% of wages in 2026, capped at $411.91 for the year—although employers may choose to pay the contribution on behalf of employees. Because PFL benefits are family leave benefits, they are taxable to the employee regardless of who funds the contribution. They are not treated as wages and are reported on Form 1099-G when paid by the State Insurance Fund or Form 1099-MISC when paid by a private carrier. Employee PFL contributions are separately reported in Box 14 of Form W-2.
New York’s DBL program has been in place much longer. Revenue Ruling 2025-4 specifically states that the IRS’s earlier guidance addressing New York disability benefit contributions, Revenue Ruling 81-192, is amplified rather than replaced. In practical terms, the existing approach continues: employer contributions are excluded from wages, while employee contributions are made on an after-tax basis.
New York therefore has not needed to make the type of statutory change adopted in Massachusetts. PFL is already employee-funded, and DBL has long operated under federal tax guidance that is consistent with the framework in Revenue Ruling 2025-4.
What employers should do now
The details vary from state to state, but employers should focus on a few practical steps:
- Understand how the program is funded. The tax treatment of medical leave benefits depends largely on whether the benefit is attributable to employer or employee contributions. Employers should confirm the contribution structure that applies to them rather than assume all PFML benefits are taxed the same way.
- Make sure employer pick-up contributions are being treated as wages. Notice 2026-6 did not extend transition relief for these payments. If an employer voluntarily pays an amount that the employee would otherwise be required to contribute, that amount must be treated as taxable wages and reported on Form W-2 for 2026.
- Continue watching for state guidance. States are still working through the administrative details of the IRS rules, and additional guidance may be issued before the current transition period ends.
- Talk with your payroll provider. Employers should confirm that their payroll systems can properly handle employer pick-up contributions and any required withholding or reporting associated with PFML benefits.
- Massachusetts employers with 25 or more covered individuals should also prepare for the 2027 funding change. DFML is expected to announce the 2027 contribution rate and the medical/family allocation by October 1, 2026. Employers should allow enough time to make payroll changes and update required employee communications before January 1.
The federal rules have made an already complicated area even more state-specific. Employers with employees in more than one state should review how each applicable program is funded and make sure their payroll and reporting practices match the rules for that state. Coordination with payroll providers and tax advisors will be particularly important as the transition period comes to an end.