Last Updated on November 2, 2026 by MyHRConcierge

Employers participating in Colorado’s Family and Medical Leave Insurance (FAMLI) program should prepare for upcoming federal tax reporting changes that will affect certain employee medical-leave benefits beginning on January 1, 2027. Under IRS Revenue Ruling 2025-4, a portion of FAMLI medical-leave benefits will be treated as taxable wages for federal employment tax purposes, creating new reporting and tax obligations for employers.

Understanding these changes now can help employers prepare their payroll processes, coordinate with tax professionals, and avoid reporting errors when the new requirements take effect.

What Is Changing Under IRS Revenue Ruling 2025-4?

Beginning in 2027, 50% of an employee’s FAMLI medical-leave benefits will be considered taxable wages for federal employment tax purposes. These payments are treated as third-party sick pay, which means they are subject to certain federal payroll tax requirements.

For employers with 10 or more employees, this change introduces additional responsibilities for reporting and paying the employer portion of applicable employment taxes. The Colorado FAMLI program will handle the employee portion of Social Security and Medicare taxes withheld from the benefits.

It is important to note that this ruling addresses FAMLI medical-leave benefits specifically. It does not establish the same tax treatment for all types of FAMLI benefits.

What Are Employers Responsible for Paying?

Under the new IRS guidance, 50% of an employee’s qualifying FAMLI medical-leave benefit will be subject to federal employment taxes.

Employers with 10 or more employees will be responsible for paying the employer share of Federal Insurance Contributions Act (FICA) taxes, which include Social Security and Medicare, as well as the applicable Federal Unemployment Tax Act (FUTA) tax on the taxable portion of these benefits.

FAMLI will withhold and remit the employee share of FICA taxes. This division of responsibility is intended to simplify the process for employers while ensuring the appropriate employment taxes are reported and paid.

What Do Employers Need to Report and When?

The new requirements will be implemented in two phases, beginning with employment tax reporting in 2027 and followed by employee wage reporting in 2028.

2027: Federal Employment Tax Reporting

Beginning in 2027, employers with 10 or more employees must report their share of FICA and FUTA taxes associated with the taxable portion of FAMLI medical-leave benefits.

Employers will file Form 941 under their own Employer Identification Number (EIN) to report and pay the employer portion of applicable taxes. Separately, FAMLI will file Form 941 under its own EIN to report the employee share of FICA taxes withheld from the benefits.

2028: Employee Wage Reporting

In 2028, employers will also have new W-2 reporting responsibilities. The taxable portion of FAMLI medical-leave benefits must be included in employees’ gross wages in Box 1 of Form W-2.

FAMLI will issue Form 1099-G for non-medical FAMLI benefits. This distinction is important for employers and payroll administrators when reconciling employee wage information and preparing year-end tax documents.

How Colorado FAMLI Will Help Simplify Compliance

Although these changes introduce additional payroll reporting responsibilities, Colorado FAMLI plans to provide employers with the information necessary to complete the process without having to independently calculate the taxable portions of employee benefits.

Beginning in 2027, FAMLI will provide a daily CSV file through each employer’s My FAMLI+ account. These reports will identify affected employees, their benefit amounts, the taxable portion of those benefits and the figures needed by payroll teams to complete employment tax reporting.

Additionally, FAMLI will provide year-end sick pay notices that employers can share directly with their payroll providers or accountants. These resources are intended to streamline reporting and reduce the administrative burden associated with the updated requirements. Employers should establish a process for reviewing these reports, sharing the information with payroll administrators and retaining the documentation needed for accurate tax reporting.

Important Considerations for Employers

There are several additional considerations employers should keep in mind as they prepare for the upcoming changes.

• Employer size matters: The new employer reporting requirements discussed here apply to employers with 10 or more employees. Employers with fewer than 10 employees are not subject to these requirements under the guidance provided by Colorado FAMLI.
• Private plans require additional review: IRS Revenue Ruling 2025-4 does not address private FAMLI plans. Employers using an approved private plan should consult with a qualified tax advisor to determine how the ruling applies to their specific arrangements.
• Colorado state income taxes are not affected: Although a portion of medical-leave benefits will be taxable for federal employment tax purposes, FAMLI benefits are not subject to Colorado state income tax.
• Payroll coordination is essential: Employers should communicate with their payroll providers and tax professionals before the 2027 implementation date to ensure reporting responsibilities are clearly understood and appropriate processes are in place.

Preparing for the 2027 FAMLI Tax Changes

The updated IRS guidance creates new federal employment tax obligations for certain Colorado employers, making early preparation important. While FAMLI will provide daily reporting files and year-end notices to help simplify the process, employers remain responsible for ensuring their applicable tax obligations are met. 

For more information on how to enhance your organization’s compliance efforts, contact MyHRConcierge at 855-538-6947, sales@myhrconcierge.com. Or, schedule a convenient consultation below: