On December 19, 2025, the IRS released Notice 2026-6, extending one component of the transition relief provided in Revenue Ruling 2025-4 for an additional year. This extension, which now covers the 2026 calendar year, gives states administering paid family and medical leave (PFML) programs and employers participating in these programs more time to update their systems and processes for federal income and employment tax compliance, according to the Notice.

The extension specifically addresses the treatment of state-paid medical leave benefits attributable to employer contributions and provides continued penalty relief for noncompliance with certain federal tax and reporting requirements through 2026.

Background

In Revenue Ruling 2025-4, issued on January 15, 2025, the IRS analyzed the federal income and employment tax treatment of contributions and benefits paid in certain situations under a hypothetical state's law on PFML. The revenue ruling also granted transitional relief for 2025 from certain withholding and reporting requirements (see Tax Alert 2025-0297).

Extension of transition relief

According to the Notice, some states requested additional time to implement the necessary changes, citing system and budget limitations. In response, the transition period is extended an additional year, through the end of 2026.

Specifically, for medical leave benefits that are paid by states during 2026 and attributable to employer contributions, states and employers are not required to comply with the federal income tax withholding and reporting requirements applicable to third-party sick pay. Therefore, they will not be subject to penalties under IRC Sections 6721 and 6722 for failure to file correct information returns or furnish correct payee statements.

In addition, states and employers are not required to comply with the Social Security and Medicare tax withholding and reporting requirements under 26 CFR Section 32.1 for medical benefits paid under a state PFML plan during 2026 and therefore are not subject to any associated penalties.

This extension does not apply to employer "pick-up" contributions (amounts employers voluntarily pay on behalf of employees for their required PFML contributions). For 2026, employers must treat these "pick-up" amounts as wages for federal employment tax purposes and report them on Form W-2.

The extension also does not apply to family leave benefits, whether funded by employer or employee contributions. According to Revenue Ruling 2025-4, these amounts must be reported on Form 1099 and are taxable income (but not wages) to the employee, even though that means both the contributions and the benefits will be taxable in some cases. The IRS separately clarified that Form 1099-G is the specific form in the 1099 series that must be used, and the draft Form 1099-G for 2026 includes a new box (box 10) to report family leave benefits.

Implications

While offering penalty relief in 2026 for certain benefit payments, the notice still requires employers to report state PFML contributions they pay on their employees' behalf as taxable wages on the employees' Forms W-2. They must also withhold on those payments for purposes of federal income tax, Social Security/Medicare and federal unemployment insurance.

Although not required, some state PFML programs may choose to comply with the third-party sick-pay rules in Notice 2015-6 for taxable medical benefits; in that case, employers must meet their FICA, Form 941 and Form 940 reporting obligations. For this reason, employers might consider proactively identifying how state PFML programs plan to address the reporting and taxation of medical leave benefits funded by employer PFML contributions for 2026, even though voluntary reporting in 2026 seems highly unlikely.

The IRS still has not provided any guidance on the federal tax treatment of private PFML plans (neither insured plans nor self-insured plans). As Revenue Ruling 2025-4 explicitly did not cover private plans, Notice 2026-6 simply extends the transition relief for one component of the ruling.