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Employment Law Update: Governors Call on IRS to Issue Guidance on State Paid Family/Medical Leave Tax Consequences

Over the past decade, and especially recently, more and more state legislatures have passed paid leave laws providing for tax-funded paid medical and/or family leave programs. These new programs provide leave for employees above and beyond the normal “PTO,” “Vacation,” or “Sick” leave employers generally afford their employees. These paid medical and family leave programs are more akin to the Federal Family and Medical Leave Act (“FMLA”), at least with respect to the grounds on which an employee may be eligible for leave. The FMLA, however, as a reminder, is unpaid, and only applies to employers with 50 or more employees. These new paid leave programs provide a set weekly payment, for a period of time, while the employee is on qualifying leave.

With the increase of state laws providing paid family and medical leave benefits, which is currently approximately 13 states and the District of Columbia, a number of Governors are now calling on the IRS to publish guidance on the tax implications for these new laws on employers and employees primarily to avoid any double taxation issues.

The paid leave programs, in general, operate as insurance programs, providing temporary leave for various reasons, including medical emergencies, child birth, family member’s military deployment, and other medical and family reasons.  With the lack of guidance from the IRS on tax treatment, employers and employees are left to wonder how, among other items, the “premiums,” in the form of payroll taxes withheld from employees, should be reported, how payroll taxes are calculated in connection with the leave premiums, and what tax documents, if any, a state should issue. As the Governors note, the most recent IRS guidance for paid leave programs was last issued in 2005.

Since 2005, paid leave has expanded across a number of states, including states within Whiteford’s footprint. Employers and employees should be cognizant of the potential tax liability, be on the lookout for potential IRS guidance, and continue to receive guidance from their tax professionals and Whiteford employment team.

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