Is Paid Family Leave Taxable in California? Understanding the Tax Implications

Paid Family Leave (PFL) is a state program in California that provides partial wage replacement to eligible employees needing time off work for specific family-related events. The PFL program is administered by the California Employment Development Department (EDD) and allows qualified workers to take up to 8 weeks of paid leave within a 12-month period.

To be eligible for PFL benefits in California, an employee must have contributed to the state disability insurance (SDI) fund through payroll deductions. Eligible circumstances include bonding with a new child, caring for a seriously ill family member, or military exigency leave. The PFL payment amount is typically 60-70% of the employee’s current wages.

While PFL benefits are not considered taxable income at the state level in California, they are subject to federal income taxes. Eligible employees will receive a Form 1099-G from EDD reflecting PFL amounts paid during the year, which must be reported as taxable income on the federal return. There are certain tax deductions and credits that can help minimize federal tax liability on PFL benefits.

What Is Paid Family Leave (PFL) in California?

The Paid Family Leave (PFL) program began in 2004 to help employees maintain a healthier work-life balance by supporting them financially during significant life events.

Under the program, California provides a portion of the wages to qualified employees who need to take time off from work due to certain family-related circumstances. This state-run program is governed by the California Employment Development Department (EDD).

Who is Eligible for PFL in California?

PFL payment is granted under the following circumstances:

  • Health care of an utterly ill family member.
  • Time to bond with a newborn.
  • Taking part in an event related to the military deployment of a family member.

To be eligible, the employee must have contributed to the SDI program through payroll deductions. The qualified person is generally paid around 60 to 70% of his current wages.

How Does PFL Work in California?

To begin with, the eligibility of the employee is verified. Once the eligibility is confirmed, one can apply for the PFL benefits, which typically involves submitting the claim form with medical reports or documentation to support the need for work leave.

Typically, one will have to wait for seven days to receive the claim benefits. As described earlier, the amount paid to the eligible employee is usually a certain percentage of the regular wage.

An employee can receive up to 8 weeks of PFL benefits within a 12-month duration. So, the claim benefits can be used intermittently according to one’s personal preference.

Is Paid Family Leave Considered Income in California?

Paid Family Leave (PFL) benefits are paid from the SDI fund. The distributed wages are not considered income in California.

Is Paid Family Leave Taxable at the Federal Level?

Federal taxes need to be paid on PFL benefits by California residents. Eligible workers can use Form W-4V to request withholding of the benefit amount to reduce federal tax liability.

Is Paid Family Leave Taxable at the State Level in California?

Paid Family Leave (PFL) is not taxable at the state level. However, one still needs to include the PFL information in the tax form for reporting purposes, even though the benefits are not subject to state taxes.

How to Report PFL on Your Taxes?

Since you must pay only federal taxes on PFL benefits in California, you need to report them as taxable income on the federal tax return only.

Eligible taxpayers will receive Form 1099-G by EDD, typically in January, reflecting the PFL benefits received during the financial year. You should report this amount in the ‘Other Income’ section of the tax return form.

You can also seek expert guidance from a qualified professional to help you with tax-related topics. Seeking professional assistance would be particularly helpful when you need clarification on a complex tax situation.

What Are the Potential Tax Deductions or Credits Related to PFL?

You can utilize the following tax deductions or credits to optimize your tax situation.

Earned Income Tax Credit (EITC)

The ETC is designed to help less income-earning families in the United States. It’s a refundable credit, meaning if the credit amount exceeds the tax liability, the difference will be sent to you. The eligibility is determined by the taxpayer’s income, qualifying children, and tax filing status.

Child and Dependent Care Tax Credit

This federal credit can provide substantial tax relief for taxpayers incurring dependent or childcare expenses. The incurred expenses must be on dependent children under 13 or disabled family members who require care. The tax credit can be up to 35% of the incurred expenses.

Self-Employment Premium Credit

Self-employed individuals who contributed towards the Paid Family Leave program can deduct the premium paid for the coverage. For federal taxation purposes, it can be reported as business expenses to reduce one’s overall taxable income.

How Can You Minimize Your Tax Liability with PFL?

There are many legal ways to minimize the tax burden related to PFL benefits.

Be Aware of the Rules

You should be aware of what credits and deductions you can apply to the taxable income so that you can reduce the overall taxable income.

Pay Smartly

When you pay for PFL coverage independently, use after-tax dollars for premium payment. Since taxes are already paid on that money, the PFL benefits can be treated as non-taxable income.

Consider Other Benefits too

If you receive other benefits, plan your leave wisely so that it does not overlap with other benefits. Depending on other benefits, your income might go into a higher tax bracket if you don’t time your work leave optimally.

What Are Some Common Misconceptions about Taxes and PFL?

State tax applies to PFL benefits

The most common misconception regarding the tax treatment of PFL is that most people consider it taxable income in all states. However, PFL benefits are not taxable in many U.S. states. The taxability depends largely on the taxpayer’s state of residence.

No need to report PFL benefits

It’s a misconception that PFL benefits should not be reported for federal tax purposes. Since the benefits are mostly taxable at the federal level, reporting it becomes important to ensure compliance with the law. The state agency will usually send you Form 1099-G, which will reflect the paid amount.

If I get terminated, my benefits will stop

A job termination in between won’t stop the Paid Family Leave (PFL) benefits. You will keep receiving the PFL benefits as long as you keep meeting the other eligibility requirements.

I can’t receive both PFL and Workers’ Compensation benefits

It’s a misconception that you can’t have both benefits. If the Worker’s Compensation weekly payment is less than the weekly payment of PFL, you will receive the difference amount.

All PFL benefits receive the same tax treatment

The laws governing the taxation of PFL benefits vary from one state to another. It may be taxable in some states and non-taxable in others. Therefore, it’s important to check the respective state laws regarding the taxation of PFL benefits.