Essential Updates On Paid Family Leave: What New Parents Need To Know About New IRS Rules

Paid family leave provides income to workers who are unable to work due to events like childbirth or caring for a seriously ill family member.

Alongside paid medical leave, it ensures wage replacement in times of illness or caregiving. However, this program is set to expire next year on January 15, 2026, and the IRS has made some changes to accommodate the transition. Here’s what you need to know.

The program is state-run, not federal. Under the Internal Revenue Code (IRC) Section 45S, the Paid Family and Medical Leave (PFML) Act dictates how these payments are taxed. Initiated on December 31, 2017, the Act is set to end on January 1, 2026. As of May 2023, only 27% of private sector workers had access to these programs. The U.S. is the only country in the Organisation for Economic Co-operation and Development (OECD) that doesn’t offer a national program, though the IRS provides employers with tax credits for benefits and contributions.

Key Changes For 2025

The IRS’s January 15 statement offers “transition relief” as the PFML Act winds down. It’s designed to give states and employers time to adjust their reporting and systems to comply with new rules. While this primarily affects tax and reporting requirements for employers, it’s important for employees too: states or employers are not required to withhold and pay taxes on these benefits in 2025. So, payments you receive during 2025 will not be subject to withholding. The contribution rate for 2025 will be set at 1% of an employee’s weekly wages, with weekly benefits being 80% of the average weekly wage.

How Paid Family Leave Works

The PFML Act allows employers to claim family leave payments as an excise tax if the leave program is mandatory by the state. They can also claim a tax credit for wages paid to employees on family leave. However, both the benefits you receive and employer contributions are considered taxable income, which you must report on your tax return. If you itemize deductions, you can deduct your own contributions. Both employer and employee contributions must match the annual contribution rate, which is based on a percentage of the employee’s weekly wages.

Eligible employees can receive up to 12 weeks of paid family leave plus 12 weeks of paid medical leave during the year they apply. The deadline for this period begins on the date of the application. Employers must have a written policy that guarantees at least two weeks of paid leave with pay equal to at least 50% of regular wages.

What’s Covered Under Family Leave?

Paid family leave covers childbirth and the time off to care for the baby, as well as leave for adoption or taking in a foster child. Medical leave under the PFML Act includes time off due to a serious health condition or to care for a spouse, parent, or child who is seriously ill. It also covers military-related leave.

What This Means for You and Your Baby

You cannot claim both family leave and medical leave at the same time. For example, if you have complications from childbirth and need to care for your new baby, you must choose one type of leave, although you can claim the other 12-week period once the first one ends. Additionally, you must have worked for your employer for at least one year to qualify.

Keep in mind, some states have their own specific requirements if you live in one of the 13 states that offer their own family and medical leave programs as of 2025. For instance, in New York, the weekly wage cap is 67% of pay as compared to the 80% under the PFML Act, and the employee fully funds it.

The 13 states with paid family and medical leave are:

• California
• Colorado
• Connecticut
• Delaware
• Maine
• Massachusetts
• Maryland
• Minnesota
• New Jersey
• New York
• Oregon
• Rhode Island
• Washington

Additionally, Washington D.C. has also passed family and medical leave legislation.

Bottom Line

Having a baby or adding a child to your family is a joyous occasion but can be financially disruptive. If you live in one of the 13 states with paid family and medical leave, the IRS may offer financial relief in 2025 to help ease the transition.

Source: Investopedia