Premium and Benefit Tax Rules – NYS PFL

New York State has released taxation rules associated with both the premium and benefits of NYS Paid Family Leave (PFL). This information is of immediate importance for payroll deductions, and for employees considering taking a leave early in 2018. Contrary to other employee benefits, such as Disability and Life insurance, PFL will not use the standard pre and post-tax deduction rules.

Release N-17-12 (Department of Taxation and Finance) explains that both premiums and benefits under PFL will be taxable. The premium, while relatively low at a maximum of $85.56 annually, is to be deducted post tax by employers. And, any benefit received will also be considered taxable income. Since income tax will not be withheld on premiums, the employee choosing to use PFL is required to report the monetary benefit as income on their state and federal tax return. NYS is allowing taxes to be withheld voluntarily from benefits being paid by an insurance carrier, but recipients should confirm this with the carrier at the time of benefit request.

The biggest impact of this decision is on the employee who submits a PFL claim. Let’s use the example of an employee with a $52,000 salary ($1000 per week). In 2017, if they take a PFL benefit they will receive $500 per week (50% average weekly wage). They would be responsible for taxes on this amount, approximately $100 per week, reducing the benefit to $400. This reduction may discourage unnecessary use, or encourage the use of other earned paid time off rather than Paid Family Leave.

KBM recommends employers confirm their payroll companies are aware of this update since many are applying deductions already. We continue to recommend educating employees on the PFL benefit and, now, how the tax rules create implications when taking a leave.

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