Quick answer: Often yes, but the result depends on who paid the benefit and whether it is family leave, medical leave, employer wages or a state program. IRS Revenue Ruling 2025-4 treats state-paid family-leave benefits under the modeled mandatory program as federal gross income, generally reported on Form 1099, while medical-leave benefits require contribution tracing.
This guide translates the controlling rule into filing and recordkeeping steps. It reflects official material available on August 17, 2026. Tax-year forms, software features, state rules and agency procedures can change, so use the instructions for the exact year and transaction involved.
At a glance
| Question | Practical answer |
|---|---|
| Who this applies to | Workers receiving state or employer paid family or medical leave |
| What this does not cover | An assumption that every state's benefit and every disability payment has identical treatment |
| Where it is handled | Form 1040 using Forms W-2, 1099 and the state's benefit statement |
How the rule works
Start by identifying the legal character of the payment, account, credit, deduction, benefit or loan. A marketing label does not control the tax result. Dates, ownership, business purpose, filing status, income limits, residency and documentation can turn a superficially similar situation into a different answer.
- State family-leave benefits described in Revenue Ruling 2025-4 are included in federal gross income but are not federal employment-tax wages.
- The employee-funded portion of state medical-leave benefits can be excluded under the ruling, while an employer-funded portion can have income and sick-pay consequences.
- Notice 2026-6 extends specified enforcement transition relief for 2026 medical-leave reporting; it does not declare the underlying benefit tax-free.
- Employer-paid salary continuation is commonly taxable wages unless a specific exclusion applies.
- State income-tax treatment can differ from federal treatment.
Practical example
A state fund pays Riley $5,000 of family-leave benefits and issues an information statement. Under the federal family-leave holding, Riley includes the benefit in gross income even though no FICA is imposed on that state family-leave payment. A separate medical-leave payment would require tracing employee and employer contributions.
This example isolates the principal rule. It is not a complete return calculation: phaseouts, other credits, state conformity, related-party rules, passive-loss limits and prior-year carryovers may change the outcome.
Step-by-step checklist
- Identify the program and type of leave.
- Separate family leave from medical or disability leave.
- Gather contribution and benefit statements.
- Reconcile Forms W-2 and 1099 to the return.
- Check the resident state's subtraction or inclusion rule.
Reconcile the result to the actual return, notice, lender disclosure or benefit statement before signing. Preserve the source documents, calculations and proof of submission; a software interview or account screen is not a substitute for evidence.
Records to keep
Keep the filed forms and schedules together with receipts, statements, contracts, account records and correspondence that establish amount, date, ownership and purpose. For an asset, credit or carryforward that affects later years, retain the origin-year worksheet through the final disposition or use year and the applicable limitation period.
Common mistakes to avoid
- Assuming no withholding means no tax.
- Treating all medical-leave benefits as fully taxable without tracing contributions.
- Ignoring a benefit because the payer is a state agency.
Correct an issuer or agency error through the documented correction process rather than silently changing a reported amount. When the dollars are material, a notice deadline is close, or the facts involve more than one jurisdiction, obtain advice from a credentialed professional who can review the complete record.
Related NavajoTax guides
Continue with multi-state filing guide, Section 105 health-plan rules. These related pages explain connected rules, but the current official form or agency instruction controls the transaction you actually report.
Frequently asked questions
Are state family-leave benefits subject to FICA?
Under the federal model analyzed in Revenue Ruling 2025-4, state family-leave benefits are income but not wages for federal employment-tax purposes.
Why might a medical-leave benefit be partly tax-free?
The portion attributable to after-tax employee contributions may qualify for exclusion, while employer-funded amounts can be treated differently.
Does 2026 transition relief change taxable income?
No. Notice 2026-6 provides administrative relief for specified reporting and employment-tax duties, not a new income exclusion.
Sources reviewed
Last reviewed: August 17, 2026. This article provides general educational information, not individualized tax, legal, investment, lending or benefits advice.