New York Issues Guidance on Tax Treatment of Paid Family Leave Benefits

New York Issues Guidance on Tax Treatment of Paid Family Leave Benefits

Beginning January 1, 2018, New York’s new Paid Family Leave Law (PFLL) program will provide Employees with leave time and partial wage replacement (1) to provide care for a family member because of the family member’s serious health condition; (2) to bond with their child during the first 12 months after the child’s birth, or during the first 12 months after placement of the child for adoption or foster care; or (3) to attend to obligations arising because the spouse, child, or parent of the employee is on active duty or has been notified of an impending call to active duty in the United States armed forces. Once the PFLL is fully phased in (2021), covered employees will be eligible for up to 12 weeks of paid family leave.

Employees are also guaranteed the right to return to their job and to continue their health insurance during the leave period. If the employee contributes to the cost of health insurance, they must continue to pay that portion of the premium cost while on Paid Family Leave.

In furtherance of the law’s aims, the State of New York recently issued much-needed guidance regarding how benefits provided under the PFLL will be treated for tax purposes. Most importantly, the guidance clarifies that deductions will be made post-tax and benefits will be considered taxable non-wage income.

NY New Paid Family Leave Law 

Starting next year, the benefits will equal 50 percent of the employee’s average weekly wage and will gradually rise to 67 percent in 2021. Benefits will be subject to a statutory cap of the same percentage of the State Average Weekly Wage. The paid leave program will be funded through employee payroll deductions. The maximum employee contribution in 2018 will be 0.126% of an employee’s weekly wage up to the annualized New York State Average Weekly Wage. Employers have been authorized, but not required, to take deductions from employee pay since July 1, 2017. Insurance coverage for Paid Family Leave must be available to employees beginning January 1, 2018, and generally will be included under an employer’s existing disability benefits policy.

Tax Treatment of Deductions and Benefits

Although the new paid leave law has tax implications for New York employees, employers, and insurance carriers, including self-insured employers, employer plans, approved third-party insurers, and the State Insurance Fund, several key tax issues remained unaddressed.

In preparing the guidance, the New York State Department of Taxation and Finance (DOTF) reviewed the PFLL, implementing regulations, and applicable laws, case law and federal guidance. It also consulted with the Internal Revenue Service regarding the appropriate tax treatment of family leave contributions and benefits under the New York program.

In light of the above, the DOTF offers the following guidance:

• 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 can request voluntary tax withholding
• Premiums will be deducted from employees’ after-tax wages
• Employers should report employee contributions on Form W-2 using Box 14 – State disability insurance taxes withheld

Benefits should be reported by the State Insurance Fund on Form 1099-G and by all other payers on Form 1099-MISC

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Gary Young, at 201-806-3364.