Are PFML Benefits Taxable? Federal, State, and 1099-G Rules

Are PFML benefits taxable? At the federal level, yes for paid family leave and partly yes for paid medical leave. Family leave benefits count as ordinary income in full. Medical leave benefits are taxable only in proportion to the share your employer contributed to the program; the share funded by your own after-tax payroll deductions is tax-free. The IRS set out this framework in Revenue Ruling 2025-4, which applies to state-run paid family and medical leave programs nationwide.¹

Family Leave: Fully Taxable, Rarely Withheld

If you took leave to bond with a new child or to care for a seriously ill family member, the entire benefit is federal gross income under Section 61.¹ The IRS does not treat family leave payments as accident or health insurance, so the Section 104(a)(3) exclusion for insurance-funded sickness payments is off the table.²

Here is the twist that produces most surprise bills. Family leave benefits are income, but the IRS does not classify them as wages. No Social Security tax, no Medicare tax, no federal unemployment tax, and no automatic income tax withholding. The state agency issues a Form 1099-G rather than a W-2, and unless you specifically requested withholding when you applied, that 1099-G will show zero federal tax withheld.¹ Collect benefits for several months, and the tax owed at filing time can run into four figures.

Medical Leave: Taxable in Proportion to the Employer Share

Leave taken for your own serious health condition is treated as the functional equivalent of accident or health insurance, and the tax outcome depends on who paid the premiums.

The portion of your medical leave benefit that traces to your own after-tax payroll contributions is excluded from gross income under Section 104(a)(3). No federal income tax, no employment taxes.² The portion tied to your employer’s contributions is taxable under Section 105(a) and treated as third-party sick pay, meaning both income tax and FICA apply.³

The taxable share tracks the contribution split. If your employer funds 60% of the PFML premium and employees fund 40%, then 60% of your medical leave benefit is taxable and 40% is tax-free.¹ Where employers have no required contribution and employee deductions fund the whole program, medical leave benefits are fully tax-free federally. Your state PFML agency publishes the current contribution split.

What Your 1099-G Should Show and How to Report It

State PFML programs issue Form 1099-G in January for benefits paid the previous year, the same form used for unemployment compensation.⁴ Box 1 is the taxable figure. For family leave, that is usually the entire benefit. For medical leave, Box 1 should already be limited to the employer-funded taxable portion rather than the full amount you received.

Report the Box 1 amount on the unemployment compensation line of Form 1040. If you did not itemize and you made employee PFML contributions during the year, you can subtract those contributions from the Box 1 amount and report only the excess.⁴

If your benefits came through a private employer plan or third-party administrator rather than the state, the taxable share is classified as sick pay and appears on a Form W-2 in Box 1 with your wages.³ W-2 reporting means FICA and income tax withholding are already applied, so there is far less risk of an unpaid balance at filing.

Deducting Your Own PFML Contributions

The IRS treats mandatory employee PFML payroll deductions as state income tax payments. If you itemize, you can deduct them on Schedule A as state and local taxes.⁵ They fall under the SALT cap, which for 2026 is $40,400 for most filers under the One Big Beautiful Bill Act. If your state income, sales, and property taxes already max out the cap, the PFML deduction adds nothing.

Taking the standard deduction instead? You get a different break. When reporting your 1099-G, you only include the amount of benefits that exceeds the contributions you made, so your contributions effectively offset the taxable share of your benefits dollar for dollar.⁴

Employer-side mandatory contributions never appear in your gross income at all. The IRS classifies them as state excise taxes owed by the business rather than a fringe benefit to you.¹

State Income Tax Treatment Varies

The federal answer above is the same everywhere. State treatment is not. Several states that run PFML programs exempt the benefits from state income tax entirely even though the same dollars are federally taxable. States without a personal income tax do not tax the benefits at all. Other states mirror the federal rules and tax the 1099-G amount for state purposes as well. Check the guidance from your state revenue department or PFML agency before assuming.

How to Avoid an Underpayment

Because family leave benefits are not wages, the paying agency has no obligation to withhold federal income tax. Some state programs let you request voluntary withholding when you apply, but the option is not universal. If withholding is not available, quarterly estimated tax payments are your safety net. You make them on Form 1040-ES. For tax year 2026, payments are due April 15, June 15, and September 15 of 2026, plus January 15, 2027 (which you can skip if you file and pay in full by February 1, 2027).⁶

Estimated payments are generally required if you expect to owe $1,000 or more after withholding and refundable credits. To sidestep an underpayment penalty, pay in at least the lesser of 90% of the current year’s tax or 100% of last year’s tax over the course of the year. That second figure rises to 110% if your prior-year adjusted gross income was over $150,000, or $75,000 if you file separately.⁷

1
Internal Revenue Service. Revenue Ruling 2025-4
2
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
3
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
4
Internal Revenue Service. About Form 1099-G, Certain Government Payments
5
Internal Revenue Service. Instructions for Schedule A (Form 1040)
6
Internal Revenue Service. 2026 Form 1040-ES
7
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty