CA Basis in Paid Family Leave Benefits

Nondeductible contributions create basis

If a governmental unemployment compensation program is funded in part by an employee’s contribution that is not deductible by the employee, then any amount received by the employee under the program is not taxable until the employee has received an amount equal to the total nondeductible contributions that the employee paid to the program.¹

CA PFL is part of SDI

CA Paid Family Leave (PFL) provides partial pay to employees who take time off from work to care for a seriously ill family member (child, parent, parent-in-law, grandparent, grandchild, sibling, spouse, or RDP) or to bond with a new child entering the family through birth, adoption, or foster care placement. The PFL program is paid for by CA workers who pay State Disability Insurance (SDI) taxes, so nondeductible SDI and VPDI contributions create basis in PFL benefits!²

Basis in PFL if contributions were not deductible

Suppose a taxpayer had mandatory SDI or VPDI withholding and received no tax benefit from deducting those contributions (either because they did not itemize or deductions for taxes paid were limited under the TCJA). In that case, benefits will not be taxable until the taxpayer has received an amount exceeding the nondeductible contributions. (SDI benefits are never taxable because they are payments for personal injury. PFL benefits are normally taxable but can be offset by nondeductible contributions.)

Historic SDI contribution amounts (to help determine basis)³

Reporting

Form 1040 Schedule 1 instructions say to reduce the amount reported on Schedule 1 Line 7 (Unemployment Compensation) by those contributions that created basis. However, this may result in an IRS notice because the tax return would not match the reporting document (Form 1099-G). To avoid a CP-2000, report the full amount of payments received on Line 7 and deduct the basis on Schedule 1 Line 8z as a negative on the “Other Income” line.

Example: Basis in CA PFL

• Newmom Nancy had a baby this year
• Received $5,000 PFL from CA
• Earns $80,000 a year
• Began itemizing her deductions in 2017 when she bought a house
• 2018 deducted $10,000 state income taxes (no deduction for SDI)
• 2019 – present deducted all SDI paid and received a tax benefit
• Started working full-time back in 2005 after she got out of college

How is this reported on her tax return?

1. From 2005 to 2016, her SDI was not deductible because she did not itemize. A rough estimate of SDI paid during that time is $6,500, which creates basis.
2. 2017 SDI was deductible, so no additional basis
3. 2018 SDI was not deducted because of the $10,000 limit on taxes, so $800 of SDI paid creates an additional basis (total basis $7,300)
4. 2019 – present SDI was deducted, so no additional basis
5. PFL received ($5,000) is not taxable until she receives more than her basis ($7,300), so none of the PFL is taxable
6. Report the total $5,000 PFL received on Schedule 1 Line 7
7. Report $5,000 of basis as a negative number on Schedule 1 Line 8z

1: Reg §1.85-1(b)(1)(iii)
2: CCA200630017
3: https://en.wikipedia.org/wiki/CA_State_Disability_Insurance