Companies with Employees or Independent Contractors in Massachusetts Subject to New Tax on July 1

The Massachusetts Paid Family and Medical Leave Act (PFMLA) includes a new state-run program that will ensure, under certain circumstances, paid leave to covered individuals for certain life events (such as newborn children, illness or injury, or caring for family members) under certain circumstances. This tax alert does not deal with the benefits that are available to individuals, but only deals with the funding requirements that impact businesses with workers in Massachusetts. To fund this program, a percentage of compensation paid to Massachusetts workers (employees and independent contractors) will be collected from businesses. A portion of the required tax can be withheld from the worker beginning July 1, 2019.
With just a little over a month until the withholding program goes live, businesses with workers in Massachusetts should review the requirements of the law, determine if they are liable, provide required notices to workers, and ensure their payroll systems are ready to withhold and remit taxes as required.

Who and what is subject to the new tax?

A business that has any Massachusetts W-2 employee (an employer) or has a Form 1099-Misc, box 7 reporting requirement to contractor(s) that make up over 50 percent of its Massachusetts workforce, defined as a Covered Business Entity (CBE), is required by the PFMLA to remit .63 percent (adjusted annually) of the compensation paid to the Social Security wage limit ($132,900 for 2019) per worker to the Family and Employment Security Trust Fund.   Only payments to employees and “Covered Contract Workers” (CCW) after June 30, 2019, are considered when calculating the tax and determining if the 2019 wage limit has been exceeded.

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This may subject companies that have no employees in Massachusetts and that have not previously been subject to taxation in that state to payroll-like reporting obligations and possibly a tax on their workers. Companies with no employee headcount in Massachusetts should be particularly careful to evaluate their contractor workforces to determine their responsibilities.  A company with no employees could be subject to this law upon hiring a contract worker earning at least $600 during the calendar year (from July 1 to December 31, 2019). 

How much will an employer or CBE need to pay?

The total 2019 contribution rate to be remitted by the employer or CBE is .63 percent of qualifying compensation paid to covered workers. This total contribution is broken down between a family leave contribution (.52 percent) and a medical leave contribution (.11 percent).  Up to 40 percent of the medical leave contribution and up to 100 percent of the family leave contribution can be withheld from the workers. The employer or CBE’s portion is the portion of the total contribution not withheld from its covered workers. Self-employed individuals who voluntarily elect coverage will pay the entire .63 percent rate.  Withholding, if any, cannot begin prior to July 1 and contributions will be due through the MassTaxConnect website on a quarterly basis. 


Are there payment-reporting obligations?

Yes. Employers and CBEs are required to report qualifying payments made to employees and CCWs in a report on a quarterly basis. In addition, payments made to contractors must be reported by employers, even if they do not qualify as a CBE.

Are there exemptions from this tax?

Employers and CBEs with an “average total workforce” of less than 25 individuals in the prior calendar year are exempt from remitting its portion of the contribution.
Additionally, companies that provide paid leave through a private plan with benefits that are the same or better than the state-provided leave options can apply for an exemption from the tax. Applications will be reviewed by the state on a rolling basis and the company cannot receive the exemption until its plan is approved.

What should be done now?

Companies should have their Massachusetts workforces reviewed to determine whether they and their employees are subject to the PFMLA. A Massachusetts workforce should also be scrutinized to determine if the average total workforce was less than 25 employees during 2018 and therefore is exempt from paying the 2019 employer or CBE portion of the tax. 

The required notice poster should be displayed in a public area of any workplace and notices should be provided to both employees and CCWs to notify them of their rights and responsibilities under the law, the implication of the new tax, and whether the company and its workers are subject to it.

In addition, companies should register through the MassTaxConnect website if they have not already.

Finally, payroll departments should take measures to prepare for the withholding tax requirement that will begin on July 1, ensuring that their systems will properly track the tax for purposes of its quarterly filings.