Paid family leave provides workers with income when they’re unable to work due to the birth of a child, among other reasons. It goes hand-in-hand with paid medical leave. The programs offer wage replacement in cases of serious illness or taking care of a loved one who’s suffering from a serious illness as well.
The program is set to expire next year, and the IRS issued guidance for some 2025 transitional changes on January 15. Here’s what you need to know.
Key Takeaways
- The Paid Family and Medical Leave (PFML) Act expires on January 1, 2026, and the IRS has made some changes to accommodate the transition.
- The PFML Act allows employers to claim certain tax breaks when they pay qualified workers who are out on leave.
- Eligible employees can receive up to 12 weeks of paid family leave plus 12 weeks of paid medical leave during the year in which they apply.
- The payments you receive in 2025 will not be subject to withholding.
The programs are provided by states, not by the federal government. Internal Revenue Code (IRC) Section 45S, the Paid Family and Medical Leave (PFML) Act, provides the terms and rules for federal tax treatment of these payments. The Act was initiated on December 31, 2017 and is set to expire on January 1, 2026. Only about one in four (27%) of private sector workers had access to these programs as of May 2023.
The U.S. is the only one of 37 Organisation for Economic Cooperation and Development (OECD) member countries that doesn’t provide a program at the national level. The Internal Revenue Service (IRS) offers employers a tax credit for benefits and contributions made, however.
Changes in 2025
The IRS has indicated that its statement on January 15, 2025, was intended to provide “transition relief” as the PFML Act winds down to its January 1, 2026 expiration. According to the IRS, this relief “is intended to provide States and employers time to configure their reporting and other systems and to facilitate an orderly transition to compliance with those rules.”
The statement applies mostly to tax and reporting requirements for employers, but this provision is important if you’re an employee: “…a state or an employer is not required to withhold and pay associated taxes.” The payments you receive in 2025 should therefore not be subject to withholding.
The 2025 standard contribution rate is 1% of the employee’s weekly wages. The weekly benefit amount is 80% of their average weekly wages.
How Paid Family Leave Works
The PFML Act allows employers to claim family leave payments made to employees as an excise tax if the leave program is mandatory and required by their state. Employers can also claim a tax credit equal to a percentage of wages paid to an employee while they’re out on family leave.
Benefits received and employer contributions are considered taxable income that’s been paid to you if you’re an employee so you have to claim them on your tax return. You can deduct your contributions made to the program if you itemize your deductions on your tax return, however. Employer and employee contributions combined must be equal to a standard contribution rate that’s set by the PFML Act annually. It’s a percentage of the employee’s weekly pay.
Eligible employees can receive up to 12 weeks of paid family leave plus 12 weeks of paid medical leave during the year in which they apply. The yearly deadline begins with the application date. Employers must have a written policy in place that provides for at least two weeks of paid family and medical leave and the pay can’t be less than 50% of what they would have earned if they’d been working.
What’s Covered Under Family Leave?
Childbirth is covered under family care along with time off to care for the baby. Adoption and taking in a foster child are covered as well.
Medical leave is covered by the PFML Act. It includes leave for suffering a serious health condition and leave to care for a spouse, parent, or child who is suffering. Deployment-related leave from military service is also covered.
“Serious” is defined as a condition that requires hospitalization or ongoing treatment by a health care provider.
What This Means for You and Your Baby
You can’t claim both family leave benefits and medical leave benefits concurrently. You’re limited to one or the other if you suffer childbirth complications and must also care for your new baby. You must claim one or the other but you can claim one 12-week period after the first 12-week period has ended.
You must also have worked for your employer for one year or longer to qualify.
Additional or varying requirements and provisions may apply if your state of residence is one of the 13 that have passed family and medical leave legislation as of 2025. New York’s weekly wage cap is 67% of pay as of 2025 compared to 80% as provided for under the PFML Act and employees fully fund it.
The 13 states with family and medical leave policies are:
- California
- Colorado
- Connecticut
- Delaware
- Maine
- Massachusetts
- Maryland
- Minnesota
- New Jersey
- New York
- Oregon
- Rhode Island
- Washington
The District of Columbia has also passed family and medical leave legislation.
The Bottom Line
Having a baby or adding a child to your family is a special time. But it can also bring a major disruption to your finances. If you live in one of the 13 states that provide paid family and medical leave, though, the IRS may have your back in 2025.