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Understand tax rules for Paid Family & Medical Leave employer pick-up contributions

by Intuit• Updated 3 weeks ago

An employer pick-up contribution means your business pays all or part of your employee’s otherwise mandatory Paid Family and Medical Leave (PFML) contribution directly from company funds, instead of deducting it from the employee’s paycheck. If you choose to pick up the employee-required portion of PFML premiums, its important to understand the tax implications for both you and your team.

IRS rules for PFML pick-up contributions

The IRS clarifies the rules for these payments (Revenue Ruling 2025-4):

It’s a taxable fringe benefit for your employee. The amount your business pays on behalf of your employee is treated as additional compensation and a taxable fringe benefit. This amount must be included in the employee’s gross income as wages for federal income tax and federal employment taxes (Social Security and Medicare).
You must report the payments on your employee’s W-2. The premium amounts you paid must be included in the following boxes:
- Box 1 (Wages, tips, other compensation)
- Box 3 (Social security wages)
- Box 5 (Medicare wages and tips)
- Important Note: This federal reporting requirement applies regardless of how your specific state treats the PFML contribution for state income tax purposes.
It’s deductible for your business. Your business can deduct these pick-up contributions as ordinary and necessary business expenses under Internal Revenue Code section 162.
It’s deductible for your employees. Employees can deduct the employer pick-up amount (along with any amounts withheld from their own wages) as state income tax payments if they choose to itemize deductions on their personal tax return. This deduction is subject to the State and Local Tax (SALT) deduction limitation.

How QuickBooks handles pick-up contributions

QuickBooks Online Payroll

We’re automating these calculations starting mid-January 2026. It’s based on how you set up your state’s paid family leave. If your contribution exceeds the employer minimum, the additional amount will be included in your employee’s federal taxable wages. This change won’t affect their net pay or state taxes.

Any paychecks created before the release will be recalculated automatically.

QuickBooks Desktop Payroll

You’ll need to set up your employer pick-up contribution as a fringe benefit.

Add a new payroll item and select Custom Setup for the setup method.
Select Company Contribution (Employer 401(K) matching contribution, HSA contribution) as the Payroll item type.
Enter the name for the company contribution, such as XXPFML Employer Pickup using the state abbreviation. This is how the contribution will appear on your employees' paychecks and in your payroll reports.
Enter the name of the PFML agency to which the liability is paid, your PFML account number, Liability account, and Expense account.
Select Fringe Benefits for the tax tracking type. This ensures proper 94X and W2 reporting.
Uncheck all but FICA and FUTA taxes for the payroll item. Note: State taxes should not be included.
On the next screen, select Neither.
Determine your employer pick-up rate by subtracting the minimum company contribution rate for your company size and PFML state from your actual contribution rate. (Example: If you are in Colorado with 10+ employees and covering 100% of PFML contributions, you will use .88% (total contribution) - .44% (ER Minimum) = .44% (ER Pickup contribution). Your limit will be your ER pickup contribution rate multiplied by the state’s PFML wage base.)
Select Finish.