As January 1, 2018, approaches and New York’s new Paid Family Leave Law (“PFL”) goes into effect, employers across the state have been updating their payroll practices to account for the new law’s cash benefit and wage deduction provisions. Many employers have asked how these benefits and deductions should be treated for tax purposes.

As discussed in earlier Legal Alerts, the New York State Workers’ Compensation Board issued regulations  that detail when and how employees may take leave under PFL, the cash amount of benefits employees may receive under PFL, and the proper amount to deduct from employees’ wages for purposes of paying PFL-related insurance premiums. But the Workers’ Compensation Board’s regulations were noticeably silent as to how benefits and premiums should be treated for tax purposes. A different state agency, the Department of Taxation and Finance, has now answered those questions in a recently published “N-Notice.”

The short notice, technically titled Notice N-17-12,” contains critical tax and wage compliance information for employers. The notice advises employers that:

  • PFL benefits paid to employees will constitute taxable income that must be included in employees’ federal gross income;
  • Taxes will not automatically be withheld from benefits, but employees may request voluntary tax withholding;
  • Premiums, which may be paid for by employee wage deductions, should be deducted from employees’ after-tax wages;
  • Employee wage deductions should be noted on their Forms W-2; and,
  • An employee’s PFL benefits should be reported by the State Insurance Fund on Form 1099-G, or 1099-MISC, as applicable.

For employers, the two biggest takeaways are that PFL benefits will constitute taxable income, and that deductions from payroll (to pay PFL insurance premiums) should be taken from employees’ after-tax wages.

As PFL’s implementation date quickly approaches, employers should watch for state agencies—such as the Workers’ Compensation Board, the Department of Taxation and Finance, or the Department of Financial Services—to further refine the new law’s application before the end of the year.