Do I need to amend federal return if state income on W2 is corrected?

[dfcmichael]

My employer issued me a W2 but I believe it's wrong. Compared to my paystub and my spouse's W2, CA PFL isn't noted in section 14 and isn't deducted from state wages. In California, parental leave income isn't subject ot state tax.
I've contacted my employer to correct the W2. If only state wages and section 14 are corrected, and there's no change on Federal wages, do I need to amend the Federal return as well?

[MonikaK1 · Accepted solution]

If the Paid Family Leave was on a W-2 issued by your employer, and not by an insurance company, then the W-2 is correct to include it in California income. 

If you did need to amend California for some other reason that didn't affect the Federal return, then you would only need to amend the state return.

In California, Paid Family Leave (“PFL”) provides benefit payments to people who need to take time off work for certain family issues.  PFL paid by the California Employment Development Department (EDD) is reported on Form 1099-G, while PFL paid through a Voluntary Plan for Disability Insurance (“VPDI”) is reported on a W-2, either through the employer or a third-party insurer.  

Paid Family Leave (PFL) income is taxable on your federal return, but not taxable on your California State return if either of the following situations apply:

• It’s paid by the state's Employment Development Department (EDD) and appears on a 1099-G form
• It’s paid by an insurance company under a Voluntary Plan for Disability Insurance (VPDI) and is reported on a W-2 from the insurance company

If your PFL is reported on a W-2, you must identify the amount (if any) that was paid by an insurance company, and not your employer.

On the “Do any of these uncommon situations apply to this W-2?” screen in the federal interview, if you mark the W-2 as containing PFL, then TurboTax will display a PFL adjustment screen in the California interview, showing the total wages from the W-2 marked by the user as containing PFL, and asks the user to review and adjust the amount as needed. The screen also instructs, “Don’t include PFL income reported on a 1099-G. This will automatically be deducted from your California income.”

If none of the amount was paid by an insurance company, and all of it was paid by your employer, enter $0 in the wages box in the PFL adjustment screen in the California interview, because any amount reported by your employer in box 16 of a W-2 is considered compensation for services or taxable fringe benefits in California.

The California Franchise Tax Board regularly audits returns with this issue and adds back to California income any amount incorrectly identified as PFL that was paid by an employer as regular wages or was excluded twice by deducting amounts already excluded on Form 1099-G.

If you got a W-2 from an insurance company for PFL, then you do subtract it from California wages. If, however, your employer just paid regular wages in your W-2, then you don't subtract it from California wages and you should remove it from the amount in the California PFL screen.

Any PFL reported on a Form 1099-G will automatically be deducted from your California income. Don't deduct it separately on the screen where you deduct PFL from an insurance company or you will get a double deduction. Also, don't deduct regular W-2 wages as PFL.

See this California EDD webpage for more information.

[dfcmichael]

Thanks for the response. I received income as part of regular paycheck but worked the process with external company MetLife. Also, on my annual paystub, the amount is noted as "CA PFL" but not shown in my W2. I've contacted my employer to inspect if a correction is needed.