Is short-term disability or parental leave paid by my employer and *not* reported on my W2 exempt from CA state tax?

[SevenO]

My spouse gave birth last year, she got a 1099-G and her tech employer topped up her vacation. We can see entries like "Parental leave" and "Short term disability" in her pay stubs, but nothing is reported on her W2. Are these California income tax exempt? If yes, I assume I need to manually add them in TurboTax, right?

[TomK2023]

Paid Family Leave (PFL) benefits are considered a type of unemployment compensation and are taxable. Your PFL benefits are taxable and reportable on your federal return only.  You will receive a 1099-G tax form in January of the following year you received benefits. 

For state taxes, PFL benefit payments are not reportable by California pursuant to Revenue and Taxation Code Section 17083.

State of California Employment Development Department - Paid Family Leave Benefits and Payments FAQs

State of California Employment Development Department - Form 1099-FAQs

[SevenO]

Thanks for the answer. Does this mean that anything else - like employer topped vacation - not reported on a 1099 cannot be state deductible ?

[MonikaK1 · Accepted solution]

Wages or vacation pay are not excludable from California income.

If your paid family leave was reported on a 1099-G from California EDD, it will automatically be subtracted from California income the same as unemployment, so don't add a separate subtraction in the California interview.

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.  Generally, PFL is taxable on the federal return, but not taxable in California.  

The amount TurboTax shows in the California interview for PFL, asking if you need to edit it, is generally because the user checked a box in completing the W-2 in the Federal section indicating that some or all of the W-2 was attributable to Paid Family Leave.

If you indicate in the Federal section that some or all of the W-2 is attributable to PFL, TurboTax displays a PFL adjustment screen in the California interview, showing the total wages from the W-2 marked by the user as containing PFL and asking 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 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.

California regularly audits returns for this issue.