Important Payroll Update: Tax Treatment of Employer-Paid PFML Contributions

This change applies to employers who choose to pay the employee’s required PFML contribution on the employee’s behalf.

Below is an overview of what is changing, what is not changing, and how this may affect payroll reporting.

What Is Changing?

If your company pays the employee’s portion of PFML contributions instead of deducting it from the employee’s paycheck, the IRS now requires that amount to be treated as taxable compensation to the employee.

This update is based on IRS guidance clarifying that when an employer covers a cost that legally belongs to the employee, the value of that payment must be included in the employee’s taxable wages for federal tax purposes.

What Is Not Changing?

- PFML contribution rates are not changing

- PFML benefits and eligibility are not changing

- Employees are not receiving additional cash pay

- State PFML laws and program rules remain the same

This is strictly a federal tax reporting and withholding change.

How This Affects Payroll

Beginning in 2026, when an employer pays the employee’s required PFML contribution, that amount will be included in the employee’s taxable wages and subject to federal income tax and FICA (Social Security and Medicare).

Although this amount does not increase take-home pay, it may result in slightly higher taxes withheld on each paycheck. Employers and employees may notice higher taxable wages on payroll reports and W-2s for impacted employees.

This does not mean employees are earning more money—only that the IRS now requires the value of this benefit to be taxed.

Do You Need to Take Action?

If your company pays any portion of the employee’s required PFML contribution on the employee’s behalf, please notify us and provide the following details:

- How the employee portion is being paid

- How frequently it is covered (each payroll, monthly, quarterly, etc.)

- Which employees are impacted

Once we receive this information, our team will review and analyze the arrangement to determine how it should be properly reflected in payroll, including taxable wages, federal withholding, and year-end W-2 reporting, in accordance with IRS requirements.

Providing this information allows us to ensure accurate payroll processing and full compliance.

If you have any questions or would like assistance reviewing your PFML setup, please reach out to our team. We are here to help ensure a smooth and compliant transition.

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