What happened?

As a reminder for employers, the Internal Revenue Service (IRS) has extended federal transition relief through calendar year 2026 for the tax treatment of certain state-paid medical leave benefits attributable to employer contributions. This affects federal withholding employment tax, and information-reporting obligations, but does not change the state PFML benefit structures or contribution rates.

Overview

The IRS extended the PFML transition period through calendar year 2026, only for the portion of state‑paid medical leave benefits attributable to employer contributions.

States and employers are not required to apply third‑party sick pay withholding, employment tax, or related information reporting to those amounts, and no penalties will apply for these specific items.

• Notice 2026-06 extends the transition relief only for state-paid medical leave benefits attributable to employer contributions.

• The Notice also states that it does not extend the separate transition relief for employer “pick-up” contributions into 2026 and therefore contemplates employers will treat those pick-up contribution amounts as wages for federal employment tax purposes and report them on Form W-2.

Why this matters:

• Employers in PFML jurisdictions can defer implementing third‑party sick pay payroll and reporting mechanics for state‑paid, employer‑funded medical benefits until after 2026, avoiding rework and penalties in 2026.

• At the same time, employer pick‑ups remain taxable wages in 2026, so payroll, W‑2 reporting, and employment tax deposits must now reflect that.

Action Steps for Compliance

• Employers should avoid implementing third‑party sick pay withholding/reporting in 2026 for state‑paid medical benefits attributable to employer contributions.

• Treat employer “pick‑up” contributions as taxable wages in 2026 and report on Form W‑2; align tax deposits accordingly.

• Confirm payroll coding:
  • Employee PFML contributions are treated as taxable wages and must be reported on Form W‑2.
  • Paid family leave benefits are taxable income but not wages, and the state generally reports them on Form 1099.
  • For paid medical leave benefits, the portion attributable to employer contributions is taxable and treated as wages, while the portion attributable to employee contributions (including employer pick‑ups) is excluded from gross income and not treated as wages, consistent with Rev. Rul. 2025‑4.

• Plan for 2027: With transition relief ending January 1, 2027, monitor IRS updates and prepare systems for full third-party sick pay compliance.

Key Risks for Employers

• Failing to treat employer pick-ups as taxable wages in 2026 (W-2 wages).

• Applying third-party sick pay rules too early in 2026 to state paid, employer funded medical benefits.

• Misclassifying wage vs. non-wage portions of medical vs. family benefits under Rev. Rul. 2025‑4

Source References                                      

• IRS Notice 2026-06 – Extension of Transition Period to Calendar Year 2026 for Certain Requirements in Revenue Ruling 2025-4 (December 19, 2025)
• IRS – 2026-2 IRB 313 – Internal Revenue Bulletin (January 5, 2026)
• IRS – Revenue Ruling 2025-4
• Federal: IRS Lends a Hand: Guidance to Treatment on Contributions to PFML Programs (VensureHR)

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