SECTION 2. BACKGROUND

On January 15, 2025, the Department of Treasury (Treasury Department) and the Internal Revenue Service (IRS) issued Revenue Ruling 2025-4, 2025-7 I.R.B. 758, providing guidance on the income and employment tax treatment of contributions and benefits paid in certain situations under a State paid family and medical leave (PFML) statute. Revenue Ruling 2025-4 includes seven separate holdings. Holding (4) concludes, in part, that amounts paid to an employee by a State as medical leave benefits that are attributable to the employer’s contribution pursuant to a State’s PFML statute are included in an employee’s gross income under § 105 ¹ except as otherwise provided in that section, are wages for Federal employment tax purposes under §§ 3121(a) and 3306(b), and are thirdparty payments of sick pay as defined in § 3402(o). Holding (4) also concludes that States must comply with the employment tax and reporting requirements that apply to such payments under § 32.1 and other guidance.

With respect to both the Federal income and employment tax obligations and related information reportion requirements discussed in holding (4), Revenue Ruling 2025-4 provides that calendar year 2025 is a transition period for purposes of IRS enforcement and administration, intended to provide States and employers time to configure their reporting and other systems and to facilitate an orderly transition to compliance with those rules. ²