Many employers provide their employees with paid sick leave, so they receive their regular pay for brief absences from work due to illness or injury. When employees are absent from work due to illness or injury for more than a few days but are expected to return to work, they may receive short-term or long-term disability payments from their employer’s sick pay plan. Third-party sick pay is paid to an employee by someone other than the employer for whom services are normally performed.
The responsibility for reporting the income and depositing the withheld employment taxes depends on the sick pay agreement and who made the payments to employees.
Payments Made by the Employer
Where the employer’s sick pay plan is self-insured, the employer bears the insurance risk and the employer makes the payments. The employer is required to withhold federal income tax based on the employee’s most recent Form W-4. The employer must also pay its portion of social security and Medicare taxes, withhold the employee’s portion of those taxes, and pay Federal Unemployment Tax (FUTA) for all payments made within six calendar months after the end of the last month during which the employee worked for the employer.
Payments Made by the Employer’s Agent
Where the employer contracts with a third-party to administer its sick pay plan. The third-party bears no insurance risk and is reimbursed on a cost-plus-fee basis by the employer. Payments made to employees by the third party are treated as if made by the employer. The employer retains the responsibility for tax withholding and payment unless it enters into an agreement with the agent providing that the agent will be responsible for employment taxes.
Payments made by a Third-Party who is Not an Agent
The employer contracts with a third-party insurer to make disability payments to its employees. The third-party bears the risk of insuring the employee, and premiums are paid by the employer and or the employees. The third-party is responsible for federal income tax withholding if requested by the employee and withholding the employee’s share of social security and Medicare tax. The third party is also responsible for the employer’s share of social security, Medicare, and FUTA, unless it transfers the liability for these taxes back to the employer.
To transfer the liability for the employer’s taxes, the third-party must:
- Withhold and timely deposit the employee’s portion of the social security and Medicare taxes;
- Notify the employer of the payments on which social security and Medicare taxes were withheld and deposited, within the time allowed for the third party to make the deposit; and
- Provide a statement to the employer by January 15 following the year during which the sick pay was paid.
Generally, the employer prepares the actual Form W-2 for the third-party sick pay received by its employees using either a separate Form W-2 for the sick pay, or combining it with the regular employee wages on one form.
The employer and the third-party payer have the option of agreeing that the third-party will be the employer’s agent solely for purposes of preparing Forms W-2 for sick pay. Under such an agreement, the third-party provides the actual Forms W-2 to each employee, and the employer files Form 8922 to reconcile its employment tax returns.
Amounts Not Subject Federal Income Tax Withholding
- Payments or parts of payments, attributable to employee contributions with after-tax dollars
- Sick pay paid to the employee’s estate or a survivor at any time after the employee’s death
Amounts Not Subject to Social Security, Medicare or FUTA Taxes
- Payments or parts of payments, attributable to employee contributions with after-tax dollars
- Payments after six calendar months’ absence from work
- Payments after an employee’s death or disability retirement
- Payments after the calendar year of employee’s death
- Payment to an employee entitled to social security disability insurance benefits
- Payments that exceed the applicable wage base
See IRS publication 15-A, Section 6, Sick Pay Reporting, for more information.