WA PFML - does this sound right?

[NaySao]

WA PFML's 1099-G guide for people who received family leave:

https://paidleave.wa.gov/app/uploads/2022/01/2022.12.1099s-insert.pdf

This makes it sound like the full amount they received is taxable, unless I am mistaken.

But I received this advice regarding my WA PFML medical leave (not family leave, no 1099-G issued) and wanted to confirm before I finalize my tax return:

"Generally if you pay for the insurance on post-tax dollars, then it would not be taxed when you receive the benefits. If you only paid a portion, or your employer paid all of the insurance premiums, then a portion or all of the benefits you receive are taxable income. According to the Washington State Department of Labor and Industries, an employer pays 26.78% and the employee pays 73.22%. Due to the fact that there is no guidance from the IRS on whether the benefits you receive for PFML are taxable or not, I would be more conservative in reporting it as taxable income. If you paid the premiums on post-tax dollars, then you may want to only include 26.78% of the benefits paid. If they were paid on a pre-tax basis, then all the benefits paid I would report as income."

Do you agree with this?

Thank you.

[AmyC]

1. Agree. Disability insurance has had those rules for years. If you pay with post tax dollars, you don't pay for benefits. 

2. Pre-tax dollars means actually not taxed. Like a 401k at work, those are pre-tax dollars. There is a difference between box 1 and box 3 on your w2. Your wages are on box 3 but the taxable wages are box 1.

You can ask your employer/ payroll if the amount is pre-tax or post-tax.

If it is post-tax, then I would keep the paystubs and proof and claim only the percentage you did not pay.

If pre -tax, all taxable.

[Edit 4/13/2023 11:37 AM]

[NaySao]

@AmyC 

Thank you for responding! I am a little confused because some of what you said conflicts with the first person, I think, so I'm having trouble understanding.

My employer said it was paid with pre-tax dollars. Box 1 and Box 3 are the same amount. I'm not sure what that means.

I paid much less in premiums than what I received in benefits.

I have been told to treat it as taxable income on this forum previously, although WA State says that it may not be but they have no idea since the IRS hasn't given them any guidance.

I looked at the PFML 1099-G guidance for their family leave (they did not provide any for medical leave) here: https://paidleave.wa.gov/app/uploads/2022/01/2022.12.1099s-insert.pdf 

And under the 1099-G "Instructions For Recipient" Box 1, the last line states, "If you do not itemize, only include an income the amount that is in excess of your contributions."

I believe this aligns with what you said.

Would you agree that I should deduct my 2022 PFML contributions from the total PFML income I received that year? (Even though medical leave didn't provide me with a 1099-G.)

Thank you.

[NaySao]

My employer went back and forth with their answer so I had to do the math for them. Therefore I have updated my original post and my reply with my follow-up clarifying questions.

[AmyC]

I am sorry my wording was unclear. 

Post tax dollars means that you qualify to take the percentage you paid  of the premiums off the taxable amount. You should only pay taxes on the 73.22% that you did not pay for. The rest of it is insurance you paid for with post tax dollars.

Since the employer thought it might be pre-tax - if it is pre-tax, then it would mean all - 100% -of the amount received is taxable. Often, there are pre-tax deductions that don't show on the w2 at all. Your income in box 3 is less than your actual pay. For example: You are salaried at $60,000/ yr but pay for medical insurance pre-tax, your box 3 might only show $58,000. Box 1 would be the same or less.

The directions about deducting the premiums as a medical expense while itemizing applies to very few people so I did not mention that before. If for some reason you are a rare person who did itemize medical bills and itemize deductions, then you would not receive full benefit. About 95% of people take the standard deduction. Of the  approximate 5% that itemize, few itemize medical expenses. Therefore, I by-passed the information assuming you are pretty normal.

A pay stub will show total earned and the deductions. The proof is in the math.

In conclusion -  choose to include 100% as taxable income unless you can show it was post-tax money that paid the premium (as I would expect, since this is like a type of medical insurance).

All of this is assuming the PFML will follow suit taxed as disability insurance -as the state is expecting. There is no right answer at this point without a ruling.

I hope this helps you at least understand the options you have. Let us know if you have more questions. Best wishes!

[NaySao]

@AmyC 

Thank you for that additional information. Hopefully this will be my last follow-up and then I can file! 🙏🙏🙏

Just to clarify--

I paid 73.22% of the 0.6% wage deduction on a pre-tax basis. Effectively ~0.439% of my gross wages went to WA PFML. The employer paid the remainder.

You are stating that I should still claim 100% of the Medical Leave income I received, correct?

And sorry for the confusion, I do not itemize. Rather, the instructions found at that previous link for their Family Leave 1099-G, under Box 1, state that people who itemize can claim their contributions as a "taxes paid" deduction, while people who don't itemize can report only the income that is in excess of the contributions.

I take that to mean that, as a non-itemizer, I should report the income as the total of [2022 PFML Income] minus [2022 Premiums Paid], which results closer to 95% of the income being reported.

Does this sound right to you?

I did not receive a 1099-G but I'm just assuming I should follow the same rules as if I had.

Thank you again!!!

[AmyC]

The premium percentage from pay is the same for everyone so it is irrelevant. However, who pays what part of it, does change.

Let me try a super exaggerated example and see if that helps. 

While working, you paid $10 in premiums for PFML

your employer paid $40. 

That means you paid 20% of the premiums, the employer paid 80%.

Receive PFML of $4000.

• If the $10 premium was pre- tax money, claim $4,000 taxable.
• If the $10 was post- tax, claim 20% nontaxable, 80% taxable. So, 4,000 x 80% = $3,200 taxable.

For you specifically, you state that you paid 73.22% of the premium and it was pre-tax. Using the example above, that brings us:

Pre-tax option -100% taxable

Post-tax option - 73.22% not taxable x $4,000 example =$2928.80 exempt from tax. This leaves $1,071.20, round down to $1,071 taxable.

[Edit 4/13/2023 11:40 AM PST @NaySao  I switched my pre-tax and post-tax, sorry!]

I hope the mud is starting to clear. It is a complicated area and you are doing great and asking good questions and clarifying information.

[NaySao]

@AmyC 

Thank you! Should I also deduct the total dollar amount of premiums I paid?  It is mentioned in the 1099-G instructions but I did not receive a 1099-G.

Also, my employer had this to say:

"Your Federal taxes were figured off your Gross wages just like the PFML and your OASDI and Medicare as well. The pre-tax deduction of PFML did not reduce your taxable income.”

This makes it sound like it's both pre-tax AND post-tax! So confusing!

[NaySao]

@AmyC 

Hi again, just adding to the last comment I left a few hours ago.

I examined my final paystubs from two employers and noticed these things:

• Both classify PFML under "taxes" rather than "deductions", even though it is an insurance premium rather than an actual tax.
• Both employers subtracted ~0.439% of my gross wages for these premiums (my 73.22% share of the 0.6% total premium), indicating it is pre-tax. However, they state it did not reduce my taxable income, possibly due to the classification (above), which makes it sound more like post-tax. I would like to know your thoughts on this - how is it actually classified?
• From what I can tell, everything listed under Taxes appears to be based off of the same total gross wage amount of each paycheck.

I'm guessing the confusion lies with it being listed as a Tax instead of a Deduction? And it's calculated on a pre-tax basis, but does not reduce taxable income.

Based on this new information and my last response, how would you classify it and how do you think I should proceed?

THANK YOU

[NaySao]

@AmyC and I apologize for the complications! 🤐

[AmyC]

I see you have spotted some of why things are not clear. The IRS has stated that if the state requires, it may considered a state tax. WA is not considering it a state tax but as insurance. 

Your employer said it was pre- tax and then said it does not reduce your taxable income so it is post-tax.

It is pure mud which is why WA posted that there are no clear rules from the IRS at the moment. It will not be income minus premiums paid. It is percentage based. So here are your options:

• Report it all and know that if you are audited, the worst case is no change or possible refund.
• Report the percentage you did not pay for and know that you could be right or you could owe penalties and interest for underpayment, if audited.

You are clearly trying to do the right thing and not willfully trying to be deceptive. 

Pick the one you can handle and go for it. Keep your records showing  WA not sure with no real guidance. Best wishes!

[NaySao]

@AmyC I get it now! It is a form of disability insurance. I will report 26.78% of the income I received, which was the portion of employer-paid premiums, since the premiums I paid must have been post-tax deductions since they did not reduce my taxable income, even though they were calculated on a pre-tax basis. (Confusing!)

Thank you so much for your time and assistance!!

I realize now that the figures in my original post were incorrect (swapped) which led to your second reply quoting the same wrong figures. I apologize. I ended up mixing myself up, through you, due to the typos of someone else! WHOOPS. I edited the percentages (the quote) in my original post. If you would like to do the same in your second answer, for anyone in the future who might read this with the same problem, I'm sure this post will help them.

You're awesome!

[NaySao]

@AmyC  regarding my last response, just to clarify, it's your 2nd comment that says this:
Post tax dollars means that you qualify to take the percentage you paid  of the premiums off the taxable amount. You should only pay taxes on the 73.22% that you did not pay for. The rest of it is insurance you paid for with post tax dollars.

(Should be 26.78%, not 73.22%, the numbers got swapped in my first post because someone else swapped them, sorry! The employer portion is only 26.78% of the 0.6% of gross wages.)