24 February 2026 Minnesota issues guidance on the income tax treatment of paid family and medical leave insurance benefits and premiums
The Minnesota Department of Employment and Economic Development (DEED) issued a fact sheet addressing state and federal tax and reporting for leave benefits and contributions under the state's paid family and medical leave insurance (PFMLI) program. The guidance explains the taxability of paid leave benefits, the deductibility of employer and employee premium contributions, voluntary state and federal income tax withholding options, and payroll and information reporting considerations. The guidance also reflects recent federal updates affecting the delay in applying the third-party sick pay rules to medical leave benefits. Minnesota Paid Leave provides paid family and medical leave benefits funded through mandatory payroll premium contributions shared by employers and employees. Under Minnesota law, premium collection began January 1, 2026, which is also when paid leave benefits became available. Employers remit PFMLI premiums quarterly to the DEED. For 2026, the program is funded through a total premium of 0.88% of employee wages (0.61% for medical leave and 0.27% for family leave), up to the Social Security wage base rounded to the nearest $1,000 ($185,000 for 2026). Small employers pay a reduced premium of 0.66% for 2026. The premium rate is subject to annual review and adjustment, subject to a statutory maximum. The statute requires that employers pay at least 50% of the total premium. Employers may choose to pay more than their required minimum share, but employees cannot be required to pay more than 50% of the total premium. Minnesota follows federal law to determine when income is included or excluded from a taxpayer's gross income and generally conforms to the IRS's conclusions regarding the federal income tax treatment of paid leave benefits. (For more information on the federal tax treatment of state PFMLI, see Tax Alerts 2025-0297 and 2025-2593.) One hundred percent of paid family leave benefits are considered income and are taxable for federal and Minnesota income tax purposes but are not considered wages. Accordingly, the DEED will report to the IRS paid family leave benefits on Form 1099-G and not Form W-2. Only the portion of paid medical leave benefits attributable to the employer's premium contribution is included in gross income. Because most employers are required to pay at least half of the total premium, 50% of paid medical leave benefits are generally considered taxable income. For certain small employers subject to a reduced required employer contribution, 33% of benefits are considered taxable income. The remaining portion attributable to the employee contribution is excluded from taxable income. The IRS has delayed the requirement to treat paid medical leave benefits as third-party sick pay until 2027. As a result, medical leave benefits paid in 2026 are not treated as wages and are not reported on Form W-2. Individuals may elect voluntary Minnesota income tax withholding of 5% and federal income tax withholding of 10% from taxable Minnesota PFMLI benefit payments. The employer-required portion does not increase or decrease taxable wages; however, the portion of the employee premium paid by the employer must be included in wages subject to Minnesota income tax and withholding and reported in box 16 of the Form W-2. The employee portion of the paid leave premium is treated as a post-tax payroll deduction, which does not reduce Minnesota taxable wages. Minnesota employers are instructed to report the amount of employee PFMLI contributions, including employee contributions paid by the employer, on Form W-2, box 14, using code MNPFML for combined family and medical leave contributions, or MNPML for medical leave contributions and MNPFL for family leave contributions. Employers and individuals should review the DEED guidance to understand the income tax treatment of Minnesota PFMLI benefits and premiums, including voluntary withholding options for individuals and the employer's withholding and reporting requirements.
Document ID: 2026-0503 | ||||||
