FMLA Income on CA state return

[aays2]

Hello,

I received FMLA benefits in CA during 2023. This benefits are included in my W-2 and I understand I need to pay federal tax on this. Since they are not taxable in CA the amount is deducted and correct amount in present on box16 of W-2.

While I am filing state tax via turbotax, line 12 of form 540 is showing the box 16 amount, but line 13 is taken from federal tax return which include the FMLA benefits.

Is this correct? I think FMLA are not state taxable.

[aays2]

Can anyone help?

[MonikaK1]

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.

[aays2]

@MonikaK1 

Thanks for the information. How I can mark the W-2 containing PFL in the box1 in TurboTax Desktop software? So that the correct PFL amount will be deducted from CA state return.

[BillM223]

Paid Family Leave (PFL) is income that is taxable on the federal return but is non-taxable on the California state return if it

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

To repeat: PFL is not included in your employer's regular W-2 but on a separate W-2 from the insurer.

Amounts called “PFL” that are paid by your employer and which appear on the W-2 from your employer (see last image below) are taxable both on the federal level and by the state of California.

When you mark a W-2 in TurboTax as being PFL, a screen about PFL appears in the California section of the interview.

**W-2 Interview**

**California Interview**

The amount of wages on the W-2 marked as PFL is displayed so you don't have to look it up, but you are asked enter the amount (if any) that was paid by an insurance company, and not your employer.

If none of the amount was paid by an insurance company but all of it was paid by your employer, then you must enter zero (0) in the wages box on this screen, because any amount reported by your employer in box 16 of a W-2 is considered by California as compensation for services or taxable fringe benefits.

Note that compensation for short-term disability, vacation days, sick leave, and other employer benefits are not considered to be tax-free PFL.

*****

What if taxpayer gets the 1099-G from the EDD? Do they report it and how?

Yes, you should receive a 1099-G from the EDD. You may be able to get it online by going to the EDD's website.

Yes, enter the 1099-G into your return, because, as I noted above, it is taxable on the federal level.

Then, when you get to the California return, there will be a screen titled "Your Unemployment or Paid Family Leave Doesn't Get Taxed in California". At the bottom of this screen, the last paragraph says that since PFL is not taxed in California, TurboTax has already subtracted the PFL from your state income, and, most importantly, "There's nothing you need to do."

This is the correct outcome.

[Soysoo]

So we recieved a deposit for out state and it was a much larger amount than normally.. I let my wife file the taxes this year and she said she just followed the directions. Well it looks like she didn’t adjust the insurance payout box to 0 for PFL payment.. and it’s our entire AGI from our w2’s..

should I file and amended form or should I wait for California to audit? 

[KeshaH]

It's better to amend the return proactively than wait for the state to audit to avoid interest and penalties.