For more than two years now, we’ve spoken and presented to various groups on New York’s Paid Family Leave Benefits Law (PFL), dozens, and dozens, and dozens of times. Like clockwork, one of the curious attendees would always ask whether PFL benefit payments would be taxable and whether PFL employee contributions would be pre- or post-tax deductions. Each time, we’d be forced to answer something along the lines of, “we don’t know yet— reasonable minds can disagree, and we are waiting on promised guidance on this from the state.” Well, throw that old answer out; we now know! The answers are the seemingly incongruous “taxable” and “post-tax.”
The New York State Department of Taxation and Finance just released an “Important Notice” on PFL (available here: https://www.tax.ny.gov/pdf/notices/n17_12.pdf ), advising that after its review of controlling law and consultation with the IRS:
- PFL benefits paid to employees will be taxable non-wage income that must be included in federal gross income;
- Taxes will not automatically be withheld from benefits, but employees can request voluntary tax withholding;
- PFL contributions will be deducted from employees’ after-tax wages;
- Employers should report employee contributions on Form W-2 using Box 14 – State disability insurance taxes withheld; and
- PFL benefits should be reported by the State Insurance Fund on Form 1099-G and by all other payers on Form 1099-MISC.
We find the two bolded items to be the most interesting because employees are going to get a tax hit here on both sides: first, they will pay for the cost of PFL benefits out of after-tax income, and then they will be taxed on any PFL benefits they receive.
The good news is that with this guidance, employers, insurance carriers, and payroll providers can now work to finalize the PFL claims and contribution processes.
(Of course, this guidance from the state adds the helpful disclaimer that, “it is the responsibility of each employee and employer/insurance carrier to consult with its tax advisor.”)
The Maximum Employee Contribution is $85.56 per year, not $1.65 per week.
Speaking of the employees deductions to fund PFL, the Department of Financial Services (DFS) recently issued Insurance Circular Letter No. 11 (2017) (available at: http://www.dfs.ny.gov/insurance/circltr/2017/cl2017_11.htm). This guidance explained that the maximum contribution for employees should be based on 0.126% of each employee’s annual wage rather than the weekly wage. (This runs counter to the DFS’s initial guidance on this issue, which was based solely on weekly wage amounts—see our earlier blog posting on this issue, available here.
Because the contribution is limited to 0.126% of the statewide average weekly wage (currently $1,305.92 per week), this changes the maximum contribution allowed from a weekly cap ($1.65 per week) to an annual cap of $85.56 per year.
The DFS argues that this approach will avoid a situation where employees with an irregular pay schedule (like those with a heavy bonus or commission structure) end up underpaying. On the other hand, this leaves employers with the question of how to implement a deduction with an annual cap (like Social Security) rather than a weekly one.
This post was co-authored by Lindsey N. Bober.