NOTE: Since this Alert was issued, EY has published an in-depth analysis of the federal income tax treatment of paid family and medical leave contributions and benefits under certain state business and personal income tax regimes. Please consult Tax Alert 2020-0128 for the latest thinking on these issues.

As previously reported, effective October 1, 2019, contributions are required to be paid for Massachusetts Paid Family and Medical Leave (PFML) in advance of benefits that will become available on and after January 1, 2021. (EY Payroll Newsflash, Vol. 20, 122, 8-22-2019.)

Following is information to address questions that have been raised about the tax treatment of Massachusetts PFML contributions.

Tax treatment of Massachusetts PFML contributions

Based on the initial rate of 0.75%, the allocation of PFML contribution rates beginning October 1, 2019 is 0.62% for medical leave and 0.13% for family leave on covered wages up to the Social Security wage limit of $132,900 for 2019.

1. Employers with fewer than 25 employees. 100% of the contributions are paid by employees; however, employers may pay some or all of the employee contribution.
2. Employers with 25 or more employees. Employees are responsible for 100% of the family leave contribution of 0.13%. Employers may withhold up to 40% of the medical leave portion of the contribution from employees' wages. Based on the medical leave rate of 0.62%, employers must calculate their contributions at a minimum of 0.372% and may withhold up to 0.248% of employees' wages and up to 100% of required contributions for family leave.

The portion of the contribution required to be paid by employers is not included in federal or Massachusetts taxable wages but if the employer pays the employee portion of the contribution, that amount is included in federal and Massachusetts taxable wages. (IRS Reg. Section  31.3401(a)-1(b)(6); IRC Section 3306(b)(6); IRC Section 3121(a)(6); Mass. Gen. L. Chapter 62 Section 1.)

Example 1: If the employer pays on behalf of their employees any portion of the PFML contributions in (1) above, that amount is included in federal and Massachusetts taxable wages. Note that the portion paid by the employee must be deducted on an after-tax basis (and cannot be deducted on a pre-tax basis).

Example 2: If the employer pays the employer portion shown in green below, this amount is not included in federal or Massachusetts taxable wages, but if the employer pays on behalf of employees any portion of the amount shown in black below, this amount is included in federal and Massachusetts taxable wages. Note that the portion paid by the employee must be deducted on an after-tax basis (and cannot be deducted on a pre-tax basis).

For information concerning the tax treatment of leave benefits provided under paid family and medical leave plans see our special report.

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EY Payroll News Flash