As employers are setting up 2018 payroll, the critical question has become, “How on earth are we supposed to tax premium payments and benefits under the New York Paid Family Leave (NYPFL) law?”
While New York has addressed some tax issues, so far there has been no official guidance from the IRS on federal tax issues. As a reminder, NYPFL coverage can be purchased from a New York insurer, self-funded by an employer with state approval or purchased through the New York State Insurance Fund (NYSIF).
There are several tax issues raised by the NYPFL law, including:
- Are employee premium payments withheld pre- or post-tax?
- Are employee premium payments subject to payroll taxes, such as FICA and FUTA?
- Are premium payments taxable if the employer pays on behalf of employees?
- Are benefits taxable to employees?
- How are tax payments or liabilities reported?
This post addresses these questions. Additionally, at the end of this post, the New York Paid Family Leave – Table of Federal Tax Withholding Obligations chart provides more detail. The New York State Department of Taxation and Finance has also issued guidance.
Are Employee Premium Payments Withheld Pre or Post Federal Income Tax?
Premium payments for NYPFL must be funded post-tax. NYPFL premium is not eligible for pre-tax treatment under a section 125 cafeteria plan because required contributions for NYPFL are treated as a New York state tax.
Are Employee Premium Payments Subject to Federal Payroll Taxes, Such as FICA and FUTA?
FICA, also known as the Social Security tax, requires employers and employees to each pay a 6.2 percent tax on wages up to the wage base of $128,400 in 2018. A 1.45 percent Medicare tax also applies with no wage cap.
NYPFL premium payments are not subject to favorable tax treatment and must be included in employee wages. These premium payments are not treated as premium for sick or disability benefits, or as any other nontaxable premium for that matter.
FUTA, the federal unemployment tax, is a 6 percent tax paid by employers on the first $7,000 of wages paid to an employee. As previously noted, NYPFL premium payments do not enjoy favorable tax treatment, so they must also be included in employee wages for this purpose.
Are Employer-Paid Premiums Taxable?
There is no direct guidance on this point relating to taxation of employer-paid NYPFL premium. There is also no specific tax law permitting the payment of such premium as a nontaxable, fringe benefit. Employee-paid NYPFL contributions are reportable as a state tax on the employee’s W-2 form, which may, in cases where deductions are itemized, be deductible by an employee on their federal tax return.
Lockton comment: Because the taxation of employer-paid NYPFL is unclear, it may be prudent for employers to impute income for NYPFL employer-paid premium and report the payment of such premium on behalf of the employee in Box 14 of the employee’s W-2 form.
Are Benefits Taxable to Employees?
In a nutshell, yes. In most cases, NYPFL benefits are subject to all taxes applicable to employee wages, but are treated as non-wage income. Benefits paid directly from an employer self-funding benefits or from a private insurance carrier are subject to several taxes:
- Federal income tax by the employee.
- FICA by both the employee and employer.
- FUTA by the employer.
However, benefits paid from the NYSIF are subject to payment of federal income tax by the employee but are exempt from payment of FICA and FUTA taxes by either the employee or employer.
How Are Tax Payments or Liabilities Reported?
Premium Contributions: Employers should report employee-paid NYPFL premium on the employee’s W-2 form using Box 14, identified as, “State disability insurance taxes withheld.” As mentioned previously, if the employer pays the premium contribution on behalf of its employees, it would be prudent to impute that income as wages and report the premium paid in Box 14 of the W-2 form. The employee may be able to deduct the premium paid as a state tax on their federal tax return.
Lockton comment: The characterization of the premium payment as a “state disability insurance tax” as instructed by the New York Department of Taxation and Finance is misleading. Paid family leave benefits are not treated as disability benefits for any tax purpose. However, premium for paid family leave is treated as the payment of a New York state tax.
Benefits: Employers paying self-funded benefits should report benefits paid to an employee as non-wage income on the employee’s W-2 form. Private insurers must report benefits as income and report any taxes withheld using Form 1099-MISC. NYSIF benefit payments and any taxes withheld are reported to employees by the NYSIF on Form 1099-G.
Lockton comment: Employers who fully insure NYPFL benefits through a private carrier will be liable to make FICA or FUTA payments on benefits paid to employees. As mentioned, this requirement does not apply to benefits paid from NYSIF. Employers need to work with their NYPFL insurance carrier to assure FICA and FUTA payments are remitted. The carrier should either make FICA and FUTA payments on behalf of the employer or should provide timely notification to the employer of the amount of non-wage benefit payments made to each employee so the employer can directly report and remit FICA and FUTA taxes for which they are liable.
New York Paid Family Leave – Table of Federal Tax Withholding Obligations
|Taxes||Premium Payments (made by or on behalf of an employee)||Benefits Paid Via Self-Funding, Private Insurance or NYSIF*|
|Federal Income Tax||Subject to federal income tax withholding as wage payment.||Subject to federal income tax as non-wage payments.|
|FICA (Social Security and Medicare Taxes)||Subject to FICA withholding and corresponding FICA payments made by the employer as wage payments.||Subject to FICA as non-wage payments made to the employee; both the employee and employer must pay applicable FICA taxes. The employer is not subject to FICA payroll taxes if benefits are paid from NYSIF*.|
|FUTA (Federal Unemployment Tax)||Subject to FUTA payments by the employer.||Subject to FUTA as non-wage payments by the employer, unless benefits are paid from NYSIF*.|
|Withholding||Withholding occurs from employee wages at the time wages used to pay premium are received, or withholding can occur on imputed income at the time the employer makes premium contributions on behalf of the employee.||Withholding is voluntary at the election of the employee, but taxes are due whether the tax is withheld or not.
Whether premium payments are made by the employee or by the employer on behalf of the employee, benefits are taxable.
* NYSIF: Both the IRS and New York State treat the NYSIF, an insurance carrier established under the New York Workers’ Compensation Law that competes with private insurance, as a state fund excluded from requirements to pay FICA and FUTA.