IRS Revenue Ruling 2025-4
On January 15, 2025 the IRS issued Revenue Ruling 2025-4. This tax guidance impacts employers in Massachusetts. Starting on January 1, 2026, DFML and employers participating in state-run Paid Family and Medical Leave (PFML) programs must comply with new IRS tax and reporting requirements. For more detailed information, read A Memo from the Massachusetts Department of Family and Medical Leave (DFML) regarding IRS Revenue Ruling 2025-4.
Overview of Employer Responsibilities for the Tax Treatment of PFML Benefit Payments
Certain portions of medical leave benefits are considered taxable third-party sick pay by the IRS. In Massachusetts, the taxability of PFML benefit payments depends on several factors, including:
- The type of leave that the employee is taking (medical vs. family)
- If the employer is required to pay medical leave contributions
- Employers with 25 or more employees and self-employed individuals are required to pay employer portions of medical leave contributions.
- Employers with fewer than 25 employees are not required to pay medical leave contributions.
Employers who are required to pay medical leave contributions will be responsible for remitting the employer share of FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes on certain medical leave benefit payments made to employees on or after January 1, 2026. These employers will also be responsible for reporting the taxable portion of medical leave benefits on the employee’s W-2.
Employers must have a Leave Administrator account in the PFML Employer Portal in order to receive important information that will assist in meeting reporting obligations. As an employer, you should also ensure that your payroll team has access to the employer portal. Learn how to create a Leave Administrator account on the employer portal.
Taxes on Medical Leave Benefits
Only the portion of the medical leave benefit amount that can be attributed to the required employer contribution is subject to taxes. Under Massachusetts law, employers with 25 or more employees are required to pay at least 60% of the medical contribution. Self-employed individuals who have opted in to the PFML program are responsible for paying the full contribution rate, which includes the employer portion of at least 60% of the medical contribution. This is the portion for which employers and self-employed individuals will be responsible for remitting and reporting taxes; this amount is referred to as “taxable third-party sick pay”.
When employees apply for leave they have the option of withholding state and federal income tax from medical leave benefits. Income taxes will only be withheld from the taxable portion of the medical leave benefit.
Example: Alex takes approved medical leave from an employer with 25 or more employees. Alex receives a medical leave benefit payment of $1,000. The employer must remit the employer portion of FICA and FUTA on $600 of that payment—this amount is referred to as “taxable third-party sick pay”. The employer must also report the taxable third-party sick pay on the employee’s Form W-2. DFML will withhold and remit Alex’s portion of FICA. If the employee opted to have income taxes withheld, federal and state income taxes will be withheld on the taxable third-party sick pay.
Taxes on Family Leave Benefits
Family leave benefits are not subject to federal employment taxes, such as FICA and FUTA.
When employees apply for leave they have the option of withholding state and federal income tax from family leave benefits. For family leave benefits, DFML will provide employees with a Form 1099-G.
Benefit Payment and Tax Information from DFML
DFML will provide employers with a daily Sick Pay Report in the employer portal, which will include the amount of medical leave payments and taxes withheld. DFML does not determine an employer’s tax liability, but the information provided on the daily Sick Pay Report will be sufficient to transfer any tax liability incurred as a result of any benefits being considered taxable third-party sick pay and wages by the IRS. It is important that employers have access to the employer portal in order to receive this important tax-related information. Employers should also ensure that their payroll team has access to the employer portal. Learn how to create a Leave Administrator account on the employer portal.
Employers are responsible for complying with their own tax remitting and reporting obligations. DFML cannot give tax advice. Employers should consult with tax professionals and/or their payroll provider for further information on tax withholding.
PFML Taxability for Employers with Exemptions
Employers with an approved exemption for a private or self-insured PFML plan should consult with third party administrators, insurance carriers, tax professionals, and/or legal counsel to determine tax treatment and reporting obligations under state and federal law.
Employer Responsibilities for the Tax Treatment of PFML Benefit Payments
Employers with 25 or more employees will be responsible for remitting the employer share of FICA (Social Security and Medicare) and FUTA taxes on employee medical leave benefit payments made on or after January 1, 2026. Employers will also be responsible for reporting these medical leave benefits on the employee’s W-2. DFML will provide employers with notice of the payments and taxes withheld via daily payment updates in the employer portal. Employers are responsible for complying with their own tax remitting and reporting obligations.
For more detailed information, read A memo from the Massachusetts Department of Family and Medical Leave (DFML) regarding IRS Revenue Ruling 2025-4
| Date published: | October 8, 2025 |
|---|---|
| Last updated: | October 8, 2025 |