Paid Family Leave treatment under American Rescue Plan

[NPUHARIC CPA]

Client received a 1099-G for paid family leave (PFL) from CA. The way this is reported in my tax software it will go to the unemployment income line of the federal tax return.
I looked at the writeup on the new law and it only mentions Unemployment up to $10,200 is free from tax, assuming AGI <$150K. No mention of PFL
How about PFL? Is this also going to be considered unemployment and will the tax software exempt the PFL, assuming the client otherwise qualify.

I am confused because any entry of a 1099-G, other than state tax refund, goes to the unemployment income line and if the new law only exempts UI and not PFL how is the tax software going to know it's not UI after I enter it? Or do I have to enter it as other income if PFL is still 100% taxable?

Thanks for any feedback.

[Burke]

As near as I can tell, Form 1099-G is not the form to report PFL. There is no box for that. What box did they put it in? It should have been on 1099MISC, Box 3, Other Income. In any event, this came up on another board, and CA PFL benefits are taxable by the IRS. Info I found indicated not taxable in CA. Other information I found indicates benefits are part of SDI in CA and that premiums for this are deducted on paychecks. So only part may be taxable depending on the TP's basis. You need to research this further to see if still current.

[NPUHARIC CPA]

As near as I can tell, Form 1099-G is not the form to report PFL. There is no box for that. What box did they put it in? It should have been on 1099MISC, Box 3, Other Income. In any event, this came up on another board, and CA PFL benefits are taxable by the IRS. Info I found indicated not taxable in CA. Other information I found indicates benefits are part of SDI in CA and that premiums for this are deducted on paychecks. So only part may be taxable depending on the TP's basis. You need to research this further to see if still current.

It was reported on form 1099-G. The CA form 1099-G reports it in Box 1 and actually calls it Unemployment Compensation/Paid Family Leave.
I am considering it Unemployment. I believe I have a reasonable basis to do so. It seems this question has stumped not only this message board but also another message board I participate in. I received NO responses on the same question.

[TaxGuyBill]

Yes, the taxable portion of PFL is considered as Unemployment (part of §85 of the Tax Code):

https://www.irs.gov/pub/irs-wd/0630017.pdf

[Rapid Robert]

TaxGuyBill has provided the source document regarding the IRS position, so that is the "official" answer.

As near as I can tell, Form 1099-G is not the form to report PFL. There is no box for that. What box did they put it in?

A simple check of the form instructions indicates otherwise.

"If you make payments from a contributory program that has been deemed to be in the nature of unemployment compensation, such as California's Family Temporary Disability Insurance payments or governmental paid family leave program payments, file a separate Form 1099-G for payments from each contributory program."

When California issues the 1099-G, per the instructions above it actually prints two separate copies of the form on one piece of paper, one for UI, and one for PFL.

However, Burke was on track with the other comments. California is one of a few states that has a mandatory employee payroll tax (CA SDI), which the IRS has determined to be a state income tax and therefore deductible on Schedule A. So unlike UI, which is paid from employer contributions, PFL is actually funded by employee contributions. However, it is still a replacement for wages and therefore per IRS is taxable as unemployment.

One twist, however, is that since it is employee funded, the treatment is different depending on whether or not the taxpayer claims the deduction on Schedule A. If so, the full amount of PFL is taxable. However, per the IRS CC memorandum, if the employee does not itemize, then only the PFL received in excess of the SDI paid is taxable. In practice, I doubt many CA tax preparers are aware of this, and I am probably guilty of reporting PFL as fully taxable on a few returns I have prepared for those who do not itemize. However, the problem would affect a very small number of people compared to regular UI recipients.

I would also observe that the IRS position seems to treat each taxable year as standalone, when in fact the PFL amounts received could reasonably be said to be based on multiple years of SDI contributions, not just the one year. So in that regard, I still regard the IRS position as flawed.

From the memo for those who don't bother to read it:

"Thus, in essence, if an individual does not take an income tax deduction equal to his or her contributions to the governmental plan, only amounts in excess of the individual’s basis in the fund are includible in gross income. Conversely, if an individual does deduct his or her contribution to the governmental plan, the entire amount of the payment is includible in gross income."

[Rapid Robert]

It seems this question has stumped not only this message board but also another message board I participate in. I received NO responses on the same question.

Not only has it not "stumped" this forum, but two other forums I participate in have both had this question asked and answered multiple times in the last few weeks since the law was passed. You might want to seek out higher quality tax discussion forums.

[LCP]

This part has me a bit confused...

Rapid Robert says: [A simple check of the form instructions indicates otherwise.

"If you make payments from a contributory program that has been deemed to be in the nature of unemployment compensation, such as California's Family Temporary Disability Insurance payments or governmental paid family leave program payments, file a separate Form 1099-G for payments from each contributory program."

When California issues the 1099-G, per the instructions above it actually prints two separate copies of the form on one piece of paper, one for UI, and one for PFL. ]

First the instructions refer to "you", an employer who makes payments filing the 1099G....and then the post goes on to refer to California filing the 1099G.

[Rapid Robert]

This part has me a bit confused...

First the instructions refer to "you", an employer who makes payments filing the 1099G....

I don't know what you are reading, but it is not the instructions for Form 1099-G, which is titled, "Certain Government Payments". Employers do not issue Form 1099-G, only governments.

[LCP]

The quoted part says "If you make payments" (an employer).......... "file Form 1099G" (I too thought that only a government would prepare that form)..

I have a California client now who received Paid Family Leave which is being included in Box 1 of the W-2 as fully taxable. Box 3 and state wages are that much less. The issuer is a university if that is pertinent.

[Rapid Robert]

I have a California client now who received Paid Family Leave which is being included in Box 1 of the W-2 as fully taxable. Box 3 and state wages are that much less. The issuer is a university if that is pertinent.

Two different things with the same name. An employer can choose to offer as a fringe benefit some paid time off for major family changes, just like paid sick leave or paid vacation. That is compensation and is properly reported on a W-2.

The PFL program administered by the State of California is something quite different from that. It is basically insurance, just like OASDI (Social Security). So everyone who earns wages pays premiums (SDI), and those who experience certain pre-defined situations make claims and get paid out, essentially the same as unemployment insurance.

If you re-read the form instruction excerpt I posted earlier, you will even see the word "insurance" used in reference to these payments.

Edit: since your client is employed by a university, then if it is a public university (i.e. run by the government) I suspect their wages are excluded from SDI. So there may be a special program for such state employees to cover paid leave in this situation, but it would not be part of the normal UI-PFL that most regular employees have access to, so the form 1099-G would not be used.

[LCP]

Two different things with the same name. An employer can choose to offer as a fringe benefit some paid time off for major family changes, just like paid sick leave or paid vacation. That is compensation and is properly reported on a W-2.

The PFL program administered by the State of California is something quite different from that. It is basically insurance, just like OASDI (Social Security). So everyone who earns wages pays premiums (SDI), and those who experience certain pre-defined situations make claims and get paid out, essentially the same as unemployment insurance.

If you re-read the form instruction excerpt I posted earlier, you will even see the word "insurance" used in reference to these payments.

Edit: since your client is employed by a university, then if it is a public university (i.e. run by the government) I suspect their wages are excluded from SDI. So there may be a special program for such state employees to cover paid leave in this situation, but it would not be part of the normal UI-PFL that most regular employees have access to, so the form 1099-G would not be used.

Thank-you for all of the information! One other thing I want to add that may be pertinent...

Client did not receive unemployment from California. However, although I haven't seen it yet, he did receive correspondence from their Unemployment office. Is it possible that the ball was in his court to communicate with them to coordinate the reporting of the PFL that his university paid him. Maybe not having done that, the university reported it on the W-2 where they might not have otherwise.

My apologies if I'm not understanding the whole issue and asking dumb questions.