There are multiple reactions one can have to a positive pregnancy test, and overwhelm is one of them. You know your life is about to change in a big way, but changes are scary, especially when it comes to your career. Knowing how maternity leave will affect your taxes, therefore, is important, especially if you plan on taking any time off, whether it be paid or unpaid. Unfortunately, taxes, and nearly everything involved in learning about, understanding, and filing taxes is confusing… to say the least. And because there isn't a uniform system in place to support working mothers and their families financially, that confusion is just the tipping point.
“To the extent an employer pays for benefits, the maternity leave would be taxable,” Jonathan Meadows, a certified public accountant, tells Romper. “Certain states, such as California and Rhode Island, have exempted maternity leave from state income tax.” In other words, how maternity leave affects your taxes will depend on where you live and the laws in that specific state. For example, if you live in New York, Meadows says the newly-introduced Paid Family Leave Act is “taxable at both the federal and New York state level.”
Currently, the United States is the only industrialized nation that doesn’t offer mandatory paid family leave. Legislation regarding maternity leave is currently provided by the Family and Medical Leave Act (FMLA) of 1993. But the FMLA only requires employers to provide 12 weeks of unpaid family leave if the company has over 50 employees, according to Forbes. So if you work for a company with less than 50 employees, you're not legally entitled to those 12 unpaid weeks. And, again, whether or not your leave was paid or unpaid may or may not dictate how your taxes are impacted.
Clearly, tax season can get a little confusing… especially if you’ve had a baby in the last year. Hopefully, the following tips will help clarify how maternity leave will affect your taxes.
1. If You Took Short-Term Disability Leave
Sarah Nieschalk, the assistant vice president of servicing at Community Tax, LLC, tells Romper, "Your pregnancy leave may be covered by your employer, inasmuch as you can receive short-term disability income. Additionally, your premium or disability payments — one or the other — will be taxed. If you really want to plan ahead (and have this option) you can use deductions from your wages, set up through your payroll department, to cover the cost of a pre-tax premium." So, planning is really key, as is an open discussion with your employer about your pregnancy, so you can make the wisest fiscal decisions for you and your family.
2. If You Took Unpaid Maternity Leave
However, there is often at least a small silver lining to unpaid maternity leave. "Your employer withholds taxes from your paycheck based on your full yearly salary, even if you take unpaid time off to care for your new baby,” Shannon McNulty, an NYC-based attorney certified financial planner, and owner of Savvy Parents, tells Romper. “This can result in excess withholding, meaning that your employer is withholding a higher amount in taxes from your paycheck than you will actually owe at the end of the year." But, she continues, “you’ll get the difference back in the form of a refund when you file your taxes with the IRS." So, while unpaid maternity leave feels discouraging, the tax refund helps, somewhat.
3. If You Took Paid Maternity Leave Or Paid Family Leave
Lucky you! In this case, McNulty says that “your time off will have no effect at all on your taxes." And, if you live in California, you are entitled by law to paid family leave, but you don't have to do anything different on your taxes here. These monies are taxed just like your salary. Yay!
4. If You Used Sick, Vacation, Or Holiday Time
If you are not offered paid time off through your employer, or your employer isn’t mandated to offer paid family leave, you can use your sick, vacation, and/or holiday time. “Typically people try to save up their vacation and sick time, and then use it to cover all or part of the time they’re on leave,” Alison Green wrote for The Cut. “For example, if you’re accrued three weeks of sick time and three weeks of vacation time, you could use those six weeks as part of your maternity leave, ensuring you’d be paid for that portion of it.”
The good news here is that come tax time, "Your compensation will be taxed exactly the same way that it would be if you hadn’t taken maternity leave," explains McNulty. Even though you're not sick, on vacation, or on holiday. But whatever. Semantics for now, until the system gets overhauled.
5. When You're "In Loco Parentis" According To The IRS
I thought this was a cool nugget of info provided by the FMLA and recognized by the IRS. Did you know that you're entitled to take family leave if you're an "in loco parentis"?According to the FMLA, this means you're an "individual who has day-to-day responsibility for the care and financial support of a child or, in the case of an employee, who had such responsibility for the employee when the employee was a child. A biological or legal relationship is not necessary." Boom! Pretty cool, and another reason to read the fine print, even if it is in Latin.
6. The IRS' Definition Of A Child
I know this sounds, um, weird, defining a child and all, but this is the government, people. Again, drawing from the FMLA, the IRS defines a child as "a biological, adopted or foster child; a step child; a legal ward; or a child of a person standing in loco parentis who is under 18 years of age or 18 years or older and incapable of self-care because of mental or physical disability." And you thought your new bundle was your pride and joy who you've been sleep training for the past couple months. Your child is now your legal dependent.
7. Tax Benefits Of Having A "Dependent"
OK, you know your kid is dependent on you. But, again, this is a legal term that can give you a cash bonus. Seriously. "As a new parent, you likely qualify for some attractive tax breaks next year. Your new addition counts as a dependent and you can also deduct childcare costs incurred while you were working," Nieschalk says.
As a working mom, you know that every penny counts. So, be sure to consult with an accountant to make sure you can take advantage of all the tax breaks of having your "dependent." While dealing with maternity leave taxation might have been a nightmare, now comes the good part: use the spoils for Junior's college fun, or to treat yourself for being the awesome, tax-season-dominating mom that you are.
Jonathan Meadows, certified public accountant, Meadows CPA, PPLC
Sarah Nieschalk, assistant vice president of servicing, Community Tax, LLC
Shannon McNulty, New York City-based attorney and certified financial planner, Savvy Parents
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