How To Set Up Third-Party Sick Pay Reporting

Background

The IRS has special rules for reporting payments made to employees during a leave of absence for a sickness, injury, or disability under a bona fide sick leave plan. There are several variables that determine the reporting rules, such as type of payments, whether the payments were made by the employer or by a third party, such as an insurance company, and which party has agreed to be responsible for reporting. Reporting also depends on who is paying the premium (the employer or employee) and if the employee, whether the employee had paid before-tax or after-tax premium contributions to the sick leave plan. These rules are explained in IRS Publication 15-A, Employer’s Supplemental Tax Guide under the “Sick Pay Reporting” section.

If a third party (such as an insurance company) is used to pay sick leave benefits, the third party may be responsible for withholding and depositing the employee’s income taxes, and also issuing a separate W-2 for the employee, depending on your service agreement. If the third party is responsible for issuing a separate W-2 to the employee, you will not need to update your payroll software with any payments, and the instructions below do not apply.

How To Set Up Sick Pay Reporting in Patriot Software

If you have a sick leave plan in place, and your company is responsible for updating the W-2 with third party sick leave payments, it is recommended that you first create two Money Types by going to Settings > Payroll Settings > Hours & Money Types > Add Money Type.

1) Sick Pay – Taxable: This Money Type would be used to update the employee’s wage history with sick leave payments made to the employee through a plan in which the employee made before-tax premium contributions. You would also use this money type if the employer had paid 100% of premiums for the plan and the employee received sick leave payments. These sick leave benefit payments are taxable.

Check the “Include as Taxable Income” box. You can choose to leave the W-2 Box and Label fields blank (as shown below), or some employers choose to use W-2 Box 14 just for informational purposes so that the amount of taxable sick leave pay appears on the employee’s W-2 in Box 14. If the sick pay is being paid by a third party (as opposed to the employer), check the “Third Party Sick Pay” box.

2) Sick Pay – Nontaxable: This Money Type would be used to update the employee’s wage history with sick leave payments made to the employee through a plan in which the employee made after-tax premium contributions. These sick leave benefit payments are not taxable.

Leave the “Include as Taxable Income” box unchecked, and Enter W-2 Box 12, Label J (as shown below). If the sick pay is being paid by a third party (as opposed to the employer), check the “Third Party Sick Pay” box.

If your company, and not the third party, is responsible for reporting the sick leave payments on the W-2, the third party will send you an annual tax statement by January 15th of the following year, so that you can update the employee’s taxable wages and taxes withheld, and will be reflected on the W-2 created in the software. Please contact our Customer Support team so we can update your payrolls to update the employee’s wages and taxes withheld so that your quarterly and year-end tax statements are accurate.

You may also have an agreement with the third party that they will withhold employee taxes and provide an additional W-2, but you as the employer will report the employer portion of social security, Medicare, and FUTA tax for the sick pay. In this case, please contact our Customer Support team so we can update the employer taxes to appear on your quarterly Form 941.

If the employee is enrolled in a sick leave plan but did not actually receive sick pay benefits, there would be no need to update the employee’s wage file with either of these two Money Types.