Third-Party Sick Pay At A Glance

Three main topics related to payments that would fall under the IRS' "Sick Pay" rules and are commonly referred to as "Third-Party Sick Pay.

Is the benefit, aka "payout," reportable on the employees' W-2s?

Yes, it's important to note that sick pay must be reported on the employee's W-2 regardless of tax implications.
Depending on your agreement, this reporting requirement typically falls on the employer but could be handled by the third-party payer.

Is the benefit, aka "payout," taxable?

When distinguishing between a taxable and nontaxable sick pay plan, there are four possible scenarios:

1. The employer pays for the entire insurance premiums. In this case, the employee pays all of the tax for the sick pay payments.
  1. The employer pays for part of the premiums, and the employee pays for the rest with after-tax dollars. Here, the employee pays a tax proportionate to the employer's portion of the payment.
  2. The employee pays for the entire premium with pre-tax dollars. In this case, the employee pays all the tax.
  3. The employee pays for the entire premium in after-tax dollars. The employee does not have to pay tax on the sick pay payments.
2. Additional information can be found in IRS Publication 15-A, Employers Supplemental Tax Guide.
  1. See Section 6. Sick Pay Reporting

How to report Third-party sick pay?

Reporting third-party sick pay can get a little tricky. You, the third party, or both you and the third party use a number of forms to report sick payments:

1. 1. Form 940: You prepare Form 940.
  2. Form 941 or 944: Both you and the third party file Form 941 or Form 944.
  3. Form 8922: Either you or the third party files Form 8922, Third Party Sick Pay Recap.
    1. You must file if you report sick pay on Forms W-2 using the name and EIN of the third party.
    2. Third party must file if they report sick pay on Forms W-2 under your name and EIN.
  4. Form W-2: Either you or the third party is responsible for third-party sick pay W-2 reporting, if applicable.

It is important to note that sick pay payments (Third-Party Sick Pay) should be reported in the tax year in which the payment(s) were made to the employee.

In Fuse, these "Third Party Sick Pay" adjustment Pay Statements can be added to either a Regular or Supplemental payroll and can be issued for employees in any status, even terminated. You do NOT need to rehire employees to process a Pay Statement for them.

Also, different earning codes need to be used depending on the taxability scenario, so please coordinate with your Support Team at Fuse to ensure the proper earning codes are built for your company, depending on the applicable scenario(s).