If you pay your employee sick pay when they miss work due to injury or illness, it is generally treated
as ordinary wages, subject to withholding for federal employment taxes. When a third party, like an
insurance company, pays your employee sick pay, income tax withholding is affected. The provider of third-party sick pay must furnish you with a Sick Pay Statement by January 15 of the year following the year in which the sick pay was paid. You include the information on that Sick Pay Statement in the employee Form W-2.
There are different types of third-party sick pay payments:
Payments made by your agent for which you are responsible for employment taxes.
Your agent is a third party that bears no insurance risk and is reimbursed on a cost-plus-fee
basis for paying sick pay and similar amounts. The agent is not responsible for employment taxes. This responsibility remains with you, the employer.
Under this option, if you or your agent make sick pay payments,
you deposit taxes and file W-2 forms, Form W-3, Form 940, and Form 941 under the same rules that apply to
regular wage payments. The sick pay is included in the total wages for that employee on the Form W-2 and withholdings are added
to the corresponding boxes for FICA, Medicare, FIT, etc.
Payments made by your agent for which the agent is responsible for employment taxes.
In this situation, your agent uses its own name and EIN when reporting to the government. Your agent issues
its own Form W-2 to your employee that reports only the sick pay amounts and withholdings. You (the employer) give
the employee a Form W-2 for wages only.
Payments made by an independent agent.
Under this option, the third party reports sick payments made to your employee on its own Form W-2. The agent withholds and pays all payroll taxes for the sick pay. You issue a Form W-2 for wages that you paid.
Payments made by an agent but the tax liability is assigned to you.
Payments for sick pay can be made by an agent who is not your agent, but according to your agreement, your portion of the payroll tax liability is transferred to you (the employer). The rules for reporting of Forms 941, 940, W-2, and W-3 are the most complex under this option and described in detail in IRS Pub. 15A.
When you report sick pay, you may either combine the sick pay with other wages and prepare a single Form W-2 for each employee,
or you may prepare separate W-2 forms for an employee, one reporting sick pay and the other reporting regular wages.
A Form W-2 must be prepared even if all of the sick pay is nontaxable.
The sick pay Form W-2 must include:
Employer name, address, and EIN
Employee name, address, and SSN
Sick pay paid to the employee
Federal income tax withheld
Employee Social Security tax withheld
Employee Medicare tax withheld
Any sick pay that was paid by a third party and was not subject to federal income tax because the employee contributed to the sick pay plan