Compliance
Staying Compliant with IRS’s PFML Transition-Year Extension
The IRS is extending relief for employer-attributable state paid family & medical leave benefits through 2026, offering breathing room for payroll tax and income inclusion compliance.
By NomadicTax Research Team • 5-8 min read • March 25, 2026
## What IRS Notice 2026-6 Does
Notice 2026-6 extends the transition period for certain items of Revenue Ruling 2025-4. That ruling covers how to treat **State Paid Family and Medical Leave (PFML)** benefits attributable to employer contributions. This extension means more time for employers and employees to adapt to changed reporting, withholding, and income recognition rules. ([irs.gov](https://www.irs.gov/irb/2026-02_IRB?utm_source=openai))
## Key Compliance Changes to Note
- Benefits paid by states under PFML statutes: amounts paid that originated from employer contributions may now be **included in employee gross income** for federal income tax purposes. This is a reversal for many who assumed all PFML benefits were tax-free. ([irs.gov](https://www.irs.gov/irb/2026-02_IRB?utm_source=openai))
- Also, those benefits are now considered **wages** for **federal employment tax (FICA, FUTA, etc.)** when attributable to employer contributions. ([irs.gov](https://www.irs.gov/irb/2026-02_IRB?utm_source=openai))
## Impact of the Transition Year Extension
Because the IRS has extended the transition for an **additional year**, certain calendar year 2026 requirements that were expected to kick in earlier are delayed—giving employers and state agencies more time to adjust forms, payroll systems, and tax risk assessments. ([irs.gov](https://www.irs.gov/irb/2026-02_IRB?utm_source=openai))
## What Employers Should Do Now
- **Audit PFML benefits program design**: identify whether employer or employee contributions fund medical leave benefits (some states differentiate how paid leave is financed). This matters for tax treatment.
- **Update payroll systems**: be prepared to **withhold and report employer-funded PFML benefit amounts** as wages, adjust employee income accordingly.
- **Adjust communications**: ensure employees understand that PFML benefits may result in tax and payroll withholdings, where employer contributions are involved.
- **Monitor regulatory updates**: government final regulations may clarify thresholds, exemptions, or guidance for mixed-fund leave benefits.
## Example
Imagine a company in Oregon where PFML premiums are split between employer and employee, then benefits paid were fully tax-free under the prior understanding. Going forward, if employer‐paid portion finances medical leave benefits, those benefits could be taxed and subject to employment taxes. Employers should model the dollar impact for employee benefits as taxable wages.
## Bottom Line
This extension offers relief from compliance acceleration but also signals that employer contributions to PFML and related benefits will face stricter tax treatment. It’s essential for businesses, payroll teams, and state agencies to begin adapting proactively to avoid surprises when regulatory enforcement begins in earnest.