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December 6, 2023
2023-2005

Colorado announces new definition of taxable wages for paid family and medical leave insurance

The Colorado Department of Labor and Employment (Department) announced that, effective January 1, 2024, a new definition of taxable wages will apply for paid family and medical leave insurance (PFML) purposes.

CRS Section 8-13.3-501 et seq., implementing the November 3, 2020 ballot initiative 283, states that from January 1, 2023 through December 31, 2024, the premium amount is 0.9% of "wages" per employee. The term "wages" is not defined.

For PFML purposes, beginning in 2024, the Department is replacing the term "wages" with "gross wages," defined as shown below.

Colorado definition of taxable wages for paid family and medical leave insurance

Compensation type

Included in gross wages

Excluded from gross wages

Salary

Yes

 

Hourly wage

Yes

 

Overtime

Yes

 

Tips

Yes

 

Bonuses

Yes

 

Commissions

Yes

 

Piece rate

Yes

 

Employer-provided paid leave (paid time off, sick, vacation, etc.)

Yes

 

Disability benefits paid by the employer and not a third party

Yes

 

Parental leave paid by a third party and not the employer

Yes

 

The value of lodging or meals used as a credit toward the minimum wage

Yes

 

Severance payments

 

Yes

Employer contributions to, or payouts from, a deferred compensation plan

 

Yes

Profit sharing

 

Yes

Pensions or retirement plan payments (but not employee contributions)

 

Yes

Expense reimbursements (mileage, travel, moving, per diems, etc.)

 

Yes

Non-monetary payments (except lodging or meals to the extent they are used as a credit toward the minimum wage)

 

Yes

Colorado's PFML taxable wages differ from Colorado unemployment insurance wages

Although Colorado's PFML and unemployment insurance programs are both administered by the Department, the definition of taxable wages are not the same.

A sample comparison is shown below. (Colorado unemployment insurance: Type of Payments Considered Wages.)

Wage definition: Colorado PFML vs. Colorado unemployment insurance

Compensation type

Colorado unemployment insurance

Colorado PFML

Pretax contributions to qualified retirement plans

Not exempt

Not exempt*

Payments for moving expenses if deduction is allowed under IRC Section 217

Exempt

Exempt without regard to IRC Section 217

Amounts paid or incurred for a dependent care plan under IRC Section 129

Exempt

Not exempt

Benefits under an educational assistance program under IRC Section 127

Exempt

Not exempt

IRC Section 125 pretax contributions for qualified benefits

Exempt

Not exempt

IRC Section 132 pretax contributions for transit and parking benefits

Not exempt

Not exempt*

All employer contributions to Colorado PFML premiums, whether paid by the employer on behalf of the employee or the required employer share

Exempt

Not exempt

Severance pay

Not exempt

Exempt

Disability payments paid after first six months of disability leave

Exempt

All disability payments paid by a third party are exempt

Parental leave paid by a third party

Not exempt

Exempt

*While not expressly stated in Colorado's PFML wage definition, it appears that employee pretax contributions under an IRC Section 125 cafeteria plan and transit/parking benefits under IRC Section 132 do not reduce taxable wages for PFML purposes, nor do employee pretax contributions to qualified retirement plans.

Wages subject to Colorado income tax and withholding

It is important to note that Colorado's wage definition for PFML and unemployment insurance also does not conform to the definition of wages for Colorado income tax and withholding purposes. Wages for Colorado income tax and withholding purposes conforms to the Internal Revenue Code. (Colorado Withholding Tax Guide.)

Ernst & Young LLP insights

Colorado employers will need to carefully review their payroll system tax configurations for 2024 to confirm that compensation and pretax deduction codes are correctly included and excluded when determining the wages subject to Colorado PFML.

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Contact Information
For additional information concerning this Alert, please contact:
 
Workforce Tax Services - Employment Tax Advisory Services
   • Kristie Lowery (kristie.lowery@ey.com)
   • Kenneth Hausser (kenneth.hausser@ey.com)
   • Debera Salam (debera.salam@ey.com)

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor

 

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