There are a variety of paid sick leave laws by state, and some employers have turned to third parties to handle their sick pay. Do your employees receive third party sick pay? If so, it is most likely payment for missed hours of work that qualified as short-term or long-term disability. It is also likely that an insurance provider made those payments. If you are using a third party for sick pay, it is important to understand your responsibilities for reporting the sick pay and for paying any taxes.
In many cases, employers add sick pay to their employees’ checks and there is no third party. These payments take the place of a regular salary when the employee is sick, injured, or otherwise temporarily disabled and unable to work. Sick pay is included in the employee’s gross wages for income taxes.
Third party sick pay via employer’s agent
As defined by the IRS, a third party may act as the employer’s agent, sometimes called a third party administrator. This agent has no direct insurance risk and is simply acting as a type of administrative service. They may determine which employees are eligible for sick pay and how much that sick pay is. These agents are paid a fee on top of the costs of paying out sick pay.
An employer’s agent will always charge a fee plus their costs for issuing the sick pay.
When an employer’s agent pays out sick pay to employees, that agent does not in any way assume the role of the employer. They are not responsible for payroll taxes or any other responsibility an employer has. All of that remains with the business.
However, the third party might pay employment taxes. The employer would have to agree that the party acting as the employer’s agent will pay employment taxes. These types of agreements must be negotiated on a case-by-case basis between the third party and the employer.
Third party — not the employer’s agent
It’s possible that a third party may pay out sick pay but not act as the employer’s agent. In this case, that third party is responsible for handling the employee’s part of Medicare and social security taxes plus any additional federal income tax withholdings that the employee has requested.
This third party must also pay the employer’s half of Medicare and social security plus their federal unemployment (FUTA) tax unless the employer and third party have agreed that the employer will handle this.
Is third party sick pay subject to taxes?
Third party sick pay is often subject to taxation. Tax obligation is determined by who is paying the insurance premium.
- 100% taxable. If an employee’s sick pay insurance is paid completely by either the employer or the employee (pre-tax dollars), then the entire amount of sick pay is taxable.
- Portion taxable. If the employer only pays a portion of the insurance premium, then the employee has to pay taxes on that amount of sick pay. For example, if the employer and employee each contribute 50% of the premium, then 50% of the sick pay is taxable.
- Not taxable. However, if an employee pays for all of their insurance premium using only after-tax income, then none of the sick payments from that insurance will be taxed.
Third party needs information
When an employer contracts with a third party to handle sick pay, they must provide specific information to the third party. This includes:
- the employee’s name and other identifying information, including their social security number.
- the employee’s total amount of wages that will be paid during the year (the standard calendar year; not the employer’s fiscal year).
- the date(s) that the employee last did work for the employer (generally only the last month)
- the amount of after-tax money, if any, the employee contributed to their sick pay plan
The IRS recently issued new rules regarding third party sick pay.
Outdated procedure. Previously, information was filed with the SSA every year.
New procedure. Starting on January 1, 2014, all third party sick pay information is to be filed with the IRS using Form 8922: Third Party Sick Pay Recap.
The IRS changed some of the rules and regulations regarding how third party sick pay is reported on Form W-2 and how payments are reported on Form 941.
Form 8922 must be filed by the third party when they’re responsible for collecting FICA tax from the employee but the employer is responsible for employer FICA and for listing all sick payments on the employee’s W-2.
The employer files Form 8922 if the above conditions are met and the third party, acting as the employer’s agent, handles all W-2 reporting.
A third party agent must also file if they pay the employee’s FICA and report it on a Form 941 while the employer pays and reports their FICA separately.
With our SaaS payroll services, Patriot can take care of your payroll tax filings and deposits for you.