IRS Tax Guidance for Employers

What’s Happening?

 IRS. Rev. Rul. 2025-4 Medical Leave Taxes

General Info: IRS Rev. Rul. 2025-24

• Some medical leave benefits = “third party sick pay”
• Third Party Sick Pay = federally taxable as wages

Who Does This Impact? 

• Only employers with 10 or more employees pay employer share of FICA & FUTA taxes on FAMLI medical benefits
• Taxable Amount = 50% of medical benefit
• FAMLI withholds employee share of FICA

Frequently Asked Questions about FAMLI and IRS Rev. Rul. 2025-4

Employers vs. Third Party Payroll Providers — Who has what reporting responsibilities?

IRS Guidance re: Outsourcing Payroll Responsibilities still applies

Forms 941, 1099G & W-2

• 2026: employers file Form 941 using their FEIN to report portion of FICA and FUTA taxes paid for medical leave.
  → FAMLI files Form 941 using FAMLI’s FEIN
• 2027: Employers report taxable medical leave benefits on W-2 forms issued to employees.
  Include taxable portion of medical benefits as gross income (box 1)
• 2027: FAMLI will only issue Form 1099G for non-medical leave benefits. 

Local Governments

No impact to Opted-Out Local Governments.

Opt-In Employees of Opted-Out Local Governments

• 2025 — all FAMLI benefits subject to federal tax
• 2026 onward:
  • FAMLI medical benefits = tax-free
  • All other FAMLI benefits = subject to federal income tax 

Private Plans & Private Plan Carriers

IRS Ruling + Guidance does not address tax liability regarding private plans. It is recommended that you speak with your tax advisor or the IRS.

From the ruling: 

“This revenue ruling does not address the Federal tax treatment of employers’ or employees’ contributions to private or self-insurance family or medical leave plans or the amounts received by the employees as benefits under these plans.”

State Taxes — Income (SI) & Unemployment (SUI)

• No paid FAMLI leave benefits are taxable for Colorado SI tax purposes.
  • IRS Rev. Rul. 2025-4 covers federal income taxes, not state income taxes.
• SUI — likely incorporates FUTA; speak with a tax advisor

Employer Pick-Up: Does paying the employee’s premiums portion increase my FICA and FUTA tax liability?

No — only 50% (or less) of the medical leave benefit amount is subject to FICA and FUTA taxes.

Employee Attrition: What if the employee who received benefits no longer works for me?  

All requirements outlined by the IRS still apply. 

• Twice-weekly CSV files sent by FAMLI = all medical benefits paid to employees within weekly time frame.
• Use CSV to reconcile your FICA report for all employees (former & current)

What if my employee works for both a large and a small employer?

A portion of medical leave benefits tied to the large employer will be taxable wages. The portion of medical leave benefits tied to the small employer is tax-free.

• FAMLI will do the math and provide the breakdown in the CSV notices.

How will taxes be assessed if an employee works for multiple large employers?

• Apportioned based on the employee’s regular work schedule.
• Example: Employee works 40 hours per week:
  • 30 hours for Employer A = 75% of taxes
  • 10 hours for Employer B = 25% of taxes
• Semi-weekly CSV notice sent by FAMLI will include this information

What if my employees are in PERA or otherwise exempt from Social Security? 

• If all employees exempt - email FAMLI directly: CDLE_FAMLI_info@state.co.us
• If only some employees exempt - FAMLI cannot separate employees individually from employer FAMLI IDs.
  • Employees who believe they are due refunds are encouraged to file Form 843 with the tax return to the IRS.