Is CA PFL Taxable? What to Know for Your Tax Return

California Paid Family Leave (PFL) provides partial wage replacement to eligible workers who take time off to care for a family member or bond with a new child. While helpful, many recipients are unsure how it affects their taxes.

Understanding PFL’s tax treatment is essential to avoid unexpected liabilities or errors when filing your return.

Tax Classification of PFL

California PFL is classified as a benefit payment rather than wages, which impacts its tax treatment. Since it is administered by the Employment Development Department (EDD) and funded through employee contributions to the State Disability Insurance (SDI) program, it follows SDI tax rules. PFL is not subject to California state income tax but is taxable at the federal level.

The IRS considers PFL payments taxable because they originate from an insurance program rather than direct employer compensation. If an employer provides PFL benefits through a voluntary plan instead of the state program, tax treatment may vary. Employer-funded benefits are fully taxable, while benefits partially funded by employees are taxable only on the portion exceeding their contributions.

Federal Tax Reporting

Because PFL is federally taxable, recipients must report it as income. The EDD issues Form 1099-G, listing total payments for the tax year. This amount is reported on Form 1040 under unemployment compensation or other taxable benefits.

PFL benefits do not have automatic federal tax withholding. Recipients can request withholding by submitting Form W-4V to the EDD, opting for a flat 10% rate. Without withholding, estimated tax payments may be necessary to avoid penalties. The IRS may impose penalties if total tax liability exceeds $1,000 after withholding and credits.

For PFL received through an employer-administered voluntary plan, tax treatment depends on the plan’s structure. Employers typically provide a tax statement, such as Form W-2 or a substitute document, indicating taxable amounts.

State Income Implications

California does not tax PFL benefits, treating them like SDI payments. Because PFL is funded through employee payroll contributions, the state considers these benefits a return of those contributions rather than taxable income. Recipients do not need to report PFL on their California tax return.

However, since PFL is federally taxable, it increases adjusted gross income (AGI), which California uses as the basis for state tax calculations. A higher AGI can impact eligibility for state tax credits and deductions, such as the California Earned Income Tax Credit (CalEITC) and other income-based benefits.

Form Documentation Requirements

Accurate documentation is necessary when reporting PFL benefits. The EDD issues Form 1099-G by January 31, detailing total benefits paid. Taxpayers should verify that the reported amount matches their records to prevent discrepancies that could trigger IRS notices or audits. Any errors should be corrected by contacting the EDD.

Recipients who opted for voluntary withholding should ensure the withheld amount is accurately reflected on Form 1099-G. Those who made estimated tax payments should keep proof of payment, such as IRS confirmations or bank statements, in case of an audit.

Nonresident and Part-Year Considerations

Taxpayers who lived in California for only part of the year or reside in another state but received PFL benefits must determine their tax obligations. Since California does not tax PFL, part-year residents and nonresidents do not owe state income tax on these benefits. However, PFL remains federally taxable and must be reported on a federal return.

For those who moved out of California mid-year, the state requires a part-year resident return (Form 540NR) to report taxable California-source income. Since PFL is not taxable in California, it does not need to be included. Nonresidents who worked in California but later relocated should check their new state’s tax laws, as some states may tax PFL payments if they treat disability benefits as taxable income. Consulting a tax professional can clarify multi-state tax obligations.

Adjusting Withholdings

Since PFL benefits do not have mandatory federal tax withholding, recipients should determine whether to adjust their tax payments to avoid unexpected liabilities. Those expecting to owe a significant amount due to PFL income can request voluntary withholding at a flat 10% rate by submitting Form W-4V to the EDD. This helps spread tax payments throughout the year instead of facing a large balance due at tax time.

For individuals who did not elect withholding and expect to owe more than $1,000 in federal taxes after credits and payments, estimated tax payments may be necessary to avoid IRS penalties. These payments are due quarterly, with deadlines in April, June, September, and January. Taxpayers can calculate their estimated liability using Form 1040-ES and submit payments electronically through the IRS website. Reviewing withholdings from other income sources, such as wages or self-employment earnings, can help determine if additional adjustments are needed.