The New York State Department of Taxation and Finance (DOTF) issued much-needed guidance regarding the tax treatment of deductions from employee wages used to finance paid family leave premiums, and the tax treatment of paid family leave benefits to be received by eligible employees.
Paid Family Leave Benefits, available to employees as of January 1, 2018, may be financed by deductions from wages under a formula set by the New York State Superintendent of Finance on June 1, 2017. Employers were permitted, but not required, to begin taking deductions from employee wages beginning on or after July 1, 2017. The New York Workers Compensation Board issued final regulations interpreting the New York Paid Family Leave Law on July 19, 2017.1 However, basic questions regarding the tax treatment of both deductions from employee wages to finance benefits – although employers have been permitted to take such deductions since July 1, 2017 – and the paid family leave benefits to be received by eligible employees, remained unanswered until now.
The state's guidance answers certain fundamental tax treatment questions. After reviewing the paid family leave statute, the final regulations, applicable laws, case law and federal guidance, and after consulting with the Internal Revenue Service, the DOTF issued guidance stating:
- Premiums are to be deducted from employee's after-tax wages.
- Paid Family Leave Benefits paid to employees will be taxable, non-wage income that must be included in federal gross income.
- Taxes will not automatically be withheld from benefits. Employees wishing to avoid tax liability for receipt of paid family leave benefits can request voluntary tax withholding from such benefits.
- Employers should report employee contributions on an IRS Form W-2 using Box 14 – State disability taxes withheld.
- Paid Family Leave Benefits should be reported by the New York State Insurance Fund (NYSIF) on IRS Form 1099-G and by all other payers (either private carriers or self-insured employers) on IRS Form 1099-Misc.
For now, the DOTF guidance is limited to these points. Employers with additional questions regarding the tax treatment of paid family leave deductions or benefits should consult experienced tax counsel and employment counsel familiar with the details of the New York Paid Family Leave Law.
1. See Stephen Fuchs and Jill Lowell, New York Issues Final Paid Family Leave Law Regulations, Littler Insight (Aug. 9, 2017).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.