New law addresses IRS guidance on state's Paid Family & Medical Leave program

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Funding modifications remove federal tax liabilities for employers and workers 

Gov. Bob Ferguson signed new legislation on Wednesday, March 11, 2026, that eases the Internal Revenue Service (IRS) tax burden on employers. It also saves money for Washington workers who participate in the state’s Paid Family and Medical Leave program. 

The measure, requested by the Employment Security Department, responds to IRS guidance issued last year pertaining to state-run paid leave programs, including Washington’s. The new law will simplify implementation and reduce ongoing tax-related burdens on employers, workers and the Employment Security Department.  

Gov. Ferguson stands behind his podium with six others after signing a bill about IRS guidance for the Paid Leave program.
Gov. Ferguson stands with representatives from the state Legislature and Employment Security Department after signing HB 2345. From left to right: Andy Aboen, legislative assistant to Rep. Suzanne Schmidt; Brian Kennedy, Employment Security Government Relations; Rep. Suzanne Schmidt, bill co-sponsor; John Mattes, Paid Leave program; Gov. Ferguson; Jared Nilsen, Employment Security Commissioner's Office; and Josh Dye, Employment Security Government Relations. Photo by Ian Couch, Governor's Communication Office.

Specifically, the new legislation: 

  • Swaps employer contributions through a technical accounting adjustment from the program’s medical leave premiums to the family leave portions. 
  • Leaves total contributions unchanged for Washington workers and employers.  

Without passage of Second Substitute House Bill 2345, certain medical leave payments from the state would have been subject to federal employment taxes, such as Social Security. Employment Security and employers also would have been required to make significant changes to business practices, resulting in increased and ongoing administrative burdens related to medical leave benefits. Read the text of the bill on the state Legislature website (PDF, 71KB).

Tax liabilities, totaling up to $30 million annually, would have been either drawn from the state’s Paid Leave trust fund or passed on to Washington employers. Because employer contributions for paid family leave are not subject to employment taxes, moving employer contributions from medical to family prevents additional federal tax liability. 

The new law will impact the 2027 premium rate split but does not affect the 2026 premium rate or contribution split. Employment Security will provide additional information to employers on how to implement the new premium split later this year. 

The state agency will announce the 2027 premium and detailed premium calculations by mid-November of this year for implementation by employers. 

Employers could still have tax implications related to premium contributions. To fully understand tax responsibilities, customers and employers should seek the advice of tax professionals. Employment Security cannot provide tax guidance.  

Access the original IRS Paid Leave ruling on the IRS website. Some portions of the ruling were delayed by this extended IRS guidance (PDF, 101KB).