In January 2025, the IRS issued guidance on the tax treatment of contributions and benefits paid under state-administered family and medical leave programs, such as Colorado’s Family and Medical Leave Insurance Program (FAMLI). (new IRS guidance.) On September 30, 2025, in a Special Edition newsletter, FAMLI Division Director Tracy Marshall addressed how the FAMLI Division will assist Colorado employers to comply with these changes, which go into effect as of January 1, 2026.
Specifically, the IRS will require Colorado employers with 10 or more employees to begin paying Social Security and Medicare taxes (FICA) and federal unemployment taxes (FUTA) on a portion of medical leave benefits provided to employees by FAMLI when an employee takes FAMLI leave for their own serious health condition (including pregnancy). The IRS will treat such benefits as a type of taxable wages called “third-party sick pay.” Benefits received by employees for FAMLI leave other than for the employee’s own health condition are not taxed.
Commencing January 1, 2026, employers with 10 or more employees will be responsible for paying the employer’s share of FICA and FUTA taxes on third-party sick pay received by employees taking FAMLI medical leave. The medical benefits that FAMLI pays to employees of small employers with fewer than 10 employees, self-employed individuals, and employees of local governments that have opted out of FAMLI will not be treated as taxable wages.
The FAMLI Division is committed to easing employers’ administrative burden by handling the employee portion of FICA taxes and sending semi-weekly updates to employers, as well as providing detailed year-end statements. The twice-weekly updates will include the name of the claimant, the taxable amount, and the details of the withholdings, while the year-end statements will include the employee’s name, last four digits of the employee’s Social Security Number, total third-party sick pay received from FAMLI, any federal income tax withheld, any Social Security tax withheld, and any Medicare tax withheld. The first year-end statement will be provided on or before January 15, 2027, for tax year 2026, and annual statements will continue to be provided on or before each January 15 thereafter.
Employers with an HR benefits email contact registered with FAMLI will receive the twice-weekly notices by email. Employers that do not have a registered HR benefits contact email address will receive these notices by mail. FAMLI is working on updating the My FAMLI+ Employer portal to deliver these notices directly to employers’ accounts.
There is nothing that employers with 10 or more employees who are enrolled in FAMLI need to do immediately. However, we recommend that you prepare for these upcoming changes by keeping abreast of communications from Employers Council and FAMLI regarding these new IRS changes, attending FAMLI information sessions, and meeting with your tax advisors to prepare.
If you have questions regarding the upcoming tax treatment of FAMLI medical benefits or any other employment-related matter, and you are a Consulting or Enterprise member, an Employers Council attorney or HR Consultant is available to assist you. Contact us at info@employerscouncil.org.
Barbara Bagdon is an attorney with Employers Council.
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