Publication 15a |
2000 Tax Year |
Chapter 7 Sick Pay Reporting
Special rules apply to the reporting of sick pay payments to
employees. How these payments are reported depends on whether the
payments are made by the employer or a third party, such as an
insurance company.
Sick pay is usually subject to social security, Medicare, and FUTA
taxes. For exceptions, see Social Security, Medicare, and FUTA
Taxes on Sick Pay later. Sick pay also may be subject to either
mandatory or voluntary Federal income tax withholding, depending on
who pays it.
Sick Pay
Sick pay generally means any amount paid under a plan because of an
employee's temporary absence from work due to injury, sickness, or
disability. It may be paid by either the employer or a third party,
such as an insurance company. Sick pay includes both short- and
long-term benefits. It is often expressed as a percentage of the
employee's regular wages.
Payments That Are Not Sick Pay
Sick pay does not include the following payments:
- Disability retirement payments. Disability
retirement payments are not sick pay and are not discussed in this
section. Those payments are subject to the rules for income tax
withholding from pensions and annuities. See section 9.
- Workers' compensation. Payments because of a
work-related injury or sickness that are made under a workers'
compensation law are not sick pay and are not subject to employment
taxes. But see Workers' Compensation--Public Employees
in section 5.
- Medical expense payments. Payments under a
definite plan or system for medical and hospitalization expenses, or
for insurance covering these expenses, are not sick pay and are not
subject to employment taxes.
- Payments unrelated to absence from work. Accident
or health insurance payments unrelated to absence from work are not
sick pay and are not subject to employment taxes. These include
payments for:
- Permanent loss of a member or function of the body,
- Permanent loss of the use of a member or function of the
body, or
- Permanent disfigurement of the body.
Example. Donald was injured in a car accident and lost
an eye. Under a policy paid for by Donald's employer, Delta Insurance
Co. paid Donald $5,000 as compensation for the loss of his eye.
Because the payment was determined by the type of injury and was
unrelated to Donald's absence from work, it is not sick pay and is not
subject to employment taxes.
Sick Pay Plan
A sick pay plan is a plan or system established by an employer
under which sick pay is available to employees generally or to a class
or classes of employees. This does not include a situation in which
benefits are provided on a discretionary or occasional basis with
merely an intention to aid particular employees in time of need.
You have a sick pay plan or system if the plan is in writing or is
otherwise made known to employees, such as by a bulletin board notice
or your long and established practice. Some indications that you have
a sick pay plan or system include references to the plan or system in
the contract of employment, employer contributions to a plan, or
segregated accounts for the payment of benefits.
Definition of employer.
The employer for whom the employee normally works, a
term used in the following discussion, is either the employer for whom
the employee was working at the time the employee became sick or
disabled or the last employer for whom the employee worked before
becoming sick or disabled, if that employer made contributions to the
sick pay plan on behalf of the sick or disabled employee.
Note:
Contributions to a sick pay plan through a cafeteria plan (by
direct employer contributions or salary reduction) are employer
contributions unless they are aftertax employee
contributions (included in taxable wages).
Third-Party Payers of Sick Pay
Employer's agent.
An employer's agent is a third party that bears no insurance risk
and is reimbursed on a cost-plus-fee basis for payment of sick pay and
similar amounts. A third party may be your agent even if the third
party is responsible for determining which employees are eligible to
receive payments. For example, if a third party provides
administrative services only, the third party is your agent. If the
third party is paid an insurance premium and is not reimbursed on a
cost-plus-fee basis, the third party is not your agent. Whether an
insurance company or other third party is your agent depends on the
terms of the agreement with you.
A third party that makes payments of sick pay as your agent is not
considered the employer and generally has no responsibility for
employment taxes. This responsibility remains with you. However, under
an exception to this rule, the parties may enter into an agreement
that makes the third-party agent responsible for employment taxes. In
this situation, the third-party agent should use its own name and EIN
(rather than your name and EIN) for the responsibilities it has
assumed.
Third party not employer's agent.
A third party that makes payments of sick pay other than as an
agent of the employer is liable for income tax withholding (if
requested by the employee) and the employee part of the social
security and Medicare taxes. The third party is also liable for the
employer part of the social security and Medicare taxes and the FUTA
tax, unless the third party transfers this liability to the employer
for whom the employee normally works. This liability is transferred if
the third party takes the following steps:
- Withholds the employee social security and
Medicare taxes from the sick pay payments.
- Makes timely deposits of the employee social
security and Medicare taxes.
- Notifies the employer for whom the employee normally works
of the payments on which employee taxes were withheld and deposited.
The third party must notify the employer within the time required for
the third party's deposit of the employee part of the social security
and Medicare taxes. For instance, if the third party is a monthly
schedule depositor, it must notify the employer by the 15th day of the
month following the month in which the sick pay payment is made
because that is the day by which the deposit is required to be made.
The third party should notify the employer as soon as information on
payments is available so that an employer required to make electronic
deposits can make them timely. For multi-employer plans, see the
special rule discussed next.
Multi-employer plan timing rule.
A special rule applies to sick pay payments made to employees by a
third-party insurer under an insurance contract with a multi-employer
plan established under a collectively bargained agreement. If the
third-party insurer making the payments complies with steps 1 and 2
above and gives the plan (rather than the employer) the required
timely notice described in step 3 above, then the plan (not the
third-party insurer) must pay the employer part of the social security
and Medicare taxes and the FUTA tax. Similarly, if, within 6 business
days of the plan's receipt of notification, the plan gives notice to
the employer for whom the employee normally works, the employer (not
the plan) must pay the employer part of the social security and
Medicare taxes and the FUTA tax.
Reliance on information supplied by the employer.
A third party that pays sick pay should request information from
the employer to determine amounts that are not subject to employment
taxes. Unless the third party has reason not to believe the
information, it may rely on that information as to the following
items:
- The total wages paid the employee during the calendar
year.
- The last month in which the employee worked for the
employer.
- The employee contributions to the sick pay plan made with
aftertax dollars.
The third party should not rely on statements regarding these items
made by the employee.
Social Security, Medicare, and FUTA Taxes on Sick Pay
Employer.
If you pay sick pay to your employee, you must generally withhold
employee social security and Medicare taxes from the sick pay. You
must timely deposit employee and employer social security and Medicare
taxes and FUTA tax. There are no special deposit rules for sick pay.
See section 11 of Circular E for more information on the deposit
rules.
Amounts not subject to social security, Medicare, or FUTA
taxes.
The following payments, whether made by the employer or a third
party, are not subject to social security, Medicare, or FUTA taxes
(different rules apply to income tax withholding):
- Payments after employee's death or disability
retirement. Social security, Medicare, and FUTA taxes do not
apply to amounts paid under a definite plan or system, as defined
under Sick Pay Plan earlier, on or after the termination of
the employment relationship because of death or disability
retirement.
However, even if there is a definite plan or system, amounts paid
to a former employee are subject to social security, Medicare, and
FUTA taxes if they would have been paid even if the employment
relationship had not terminated because of death or disability
retirement. For example, a payment to a disabled former employee for
unused vacation time would have been made whether or not the employee
retired on disability. Therefore, the payment is wages and is subject
to social security, Medicare, and FUTA taxes.
- Payments after calendar year of employee's death.
Sick pay paid to the employee's estate or survivor after the
calendar year of the employee's death is not subject to social
security, Medicare, or FUTA taxes. (Also see Amounts not subject
to income tax withholding under Income Tax Withholding on
Sick Pay later.)
Example. Sandra became entitled to sick pay on November
30, 2000, and died December 26, 2000. On January 14, 2001, Sandra's
sick pay for the period from December 19 through December 26, 2000,
was paid to her survivor. The payment is not subject to social
security, Medicare, or FUTA taxes.
- Payments to an employee entitled to disability
insurance benefits. Payments to an employee when the employee is
entitled to disability insurance benefits under section 223(a) of the
Social Security Act are not subject to social security and Medicare
taxes. This rule applies only if the employee became entitled to the
Social Security Act benefits before the calendar year in which the
payments are made, and the employee performs no services for the
employer during the period for which the payments are made. These
payments are subject to FUTA tax.
- Payments that exceed the applicable wage base.
Social security and FUTA taxes do not apply to payments of sick
pay that, when combined with the regular wages and sick pay previously
paid to the employee during the year, exceed the applicable wage base.
Because there is no Medicare tax wage base, this exception does not
apply to Medicare tax. The social security tax wage base for 2001 is
$80,400. The FUTA tax wage base is $7,000.
Example. If an employee receives $80,000 in wages from
an employer in 2001 and then receives $10,000 of sick pay, only the
first $400 of the sick pay is subject to social security tax. All of
the sick pay is subject to Medicare tax. None of the sick pay is
subject to FUTA tax. See Example of Figuring and Reporting Sick
Pay later.
- Payments after 6 months absence from work. Social
security, Medicare, and FUTA taxes do not apply to sick pay paid more
than 6 calendar months after the last calendar month in which the
employee worked.
Example 1. Ralph's last day of work before he became
entitled to receive sick pay was December 10, 2000. He was paid sick
pay for 9 months before his return to work on September 7, 2001. Sick
pay paid to Ralph after June 30, 2001, is not subject to social
security, Medicare, or FUTA taxes.
Example 2. The facts are the same as in Example 1,
except that Ralph worked 1 day during the 9-month period, on February
16, 2001. Because the 6-month period begins again in March, only the
sick pay paid to Ralph after August 31, 2001, is exempt from social
security, Medicare, and FUTA taxes.
- Payments attributable to employee contributions.
Social security, Medicare, and FUTA taxes do not apply to
payments, or parts of payments, attributable to employee contributions
to a sick pay plan made with aftertax dollars.
(Contributions to a sick pay plan made on behalf of employees with
employees' pretax dollars under a cafeteria plan are employer
contributions.)
Group policy. If both the employer and the employee
contributed to the sick pay plan under a group insurance policy,
figure the taxable sick pay by multiplying it by the percentage of the
policy's cost that was contributed by the employer for the 3 policy
years before the calendar year in which the sick pay is paid. If the
policy has been in effect fewer than 3 years, use the cost for the
policy years in effect or, if in effect less than 1 year, a reasonable
estimate of the cost for the first policy year.
Example. Alan is employed by Edgewood Corporation.
Because of an illness, he was absent from work for 3 months during
2001. Key Insurance Company paid Alan $2,000 sick pay for each month
of his absence under a policy paid for by contributions from both
Edgewood and its employees. All the employees' contributions were paid
with aftertax dollars. For the 3 policy years before 2001, Edgewood
paid 70% of the policy's cost and its employees paid 30%. Because 70%
of the sick pay paid under the policy is due to Edgewood's
contributions, $1,400 ($2,000 x 70%) of each payment made to
Alan is taxable sick pay. The remaining $600 of each payment that is
due to employee contributions is not taxable sick pay and is not
subject to employment taxes. Also, see Example of Figuring and
Reporting Sick Pay later.
Income Tax Withholding on Sick Pay
The requirements for income tax withholding on sick pay and the
methods for figuring it differ depending on whether the sick pay is
paid by:
- The employer,
- An agent of the employer (defined earlier), or
- A third party that is not the employer's agent.
Employer or employer's agent.
Sick pay paid by you or your agent is subject to mandatory income
tax withholding. An employer or agent paying sick pay generally
determines the income tax to be withheld based on the employee's Form
W-4. The employee cannot choose how much will be withheld by giving
you or your agent a Form W-4S, Request for Federal Tax
Withholding From Sick Pay. Sick pay paid by an agent is treated as
supplemental wages. If the agent does not pay regular wages to the
employee, the agent may choose to withhold income tax at a flat 28%
rate, rather than at the wage withholding rate.
Third party not an agent.
Sick pay paid by a third party that is not your agent is not
subject to mandatory income tax withholding. However, an
employee may elect to have income tax withheld by submitting Form W-4S
to the third party.
If Form W-4S has been submitted, the third party should withhold
income tax on all payments of sick pay made 8 or more days after
receiving the form. The third party may, at its option, withhold
income tax before 8 days have passed.
The employee may request on Form W-4S to have a specific whole
dollar amount withheld. However, if the requested withholding would
reduce any net payment below $10, the third party should not withhold
any income tax from that payment. The minimum amount of withholding
that the employee can specify is $20 a week.
Withhold from all payments at the same rate. For example, if $25 is
withheld from a regular full payment of $100, then $20 (25%) should be
withheld from a partial payment of $80.
Amounts not subject to income tax withholding.
The following amounts, whether paid by you or a third party, are
not wages subject to income tax withholding.
- Payments after the employee's death. Sick pay
paid to the employee's estate or survivor at any time after the
employee's death is not subject to income tax withholding, regardless
of who pays it.
- Payments attributable to employee contributions.
Payments, or parts of payments, attributable to employee
contributions made to a sick pay plan with aftertax dollars are not
subject to income tax withholding. For more information, see the
corresponding discussion in Amounts not subject to social
security, Medicare, or FUTA taxes earlier.
Depositing and Reporting
This section discusses who is liable for depositing social
security, Medicare, FUTA, and withheld income taxes on sick pay. These
taxes must be deposited under the same rules that apply to deposits of
taxes on regular wage payments. See Circular E for information on the
deposit rules.
This section also explains how sick pay should be reported on Forms
W-2, W-3, 940 or 940-EZ, and 941.
Sick Pay Paid by Employer or Agent
If you or your agent (defined earlier) make sick pay payments, you
deposit taxes and file Forms W-2, W-3, 940 or 940-EZ, and 941 under
the same rules that apply to regular wage payments.
However, the agreement between the parties may require your agent
to carry out responsibilities that would otherwise have been borne by
you. In this situation, your agent should use its own name and EIN
(rather than yours) for the responsibilities it has assumed.
Reporting sick pay on Form W-2.
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 Forms
W-2 for each employee, one reporting sick pay and the other reporting
regular wages. A Form W-2 must be prepared even if all the sick pay is
nontaxable (see Box 13 below in the list of information
that must be included on Form W-2). All Forms W-2 must be given to the
employees by January 31.
The Form W-2 filed for the sick pay must include the employer's
name, address, and EIN; the employee's name, address, and SSN; and the
following information:
- Box 1 - Sick pay the employee must include in
income.
- Box 2 - Any Federal income tax withheld from the sick
pay.
- Box 3 - Sick pay subject to employee social security
tax.
- Box 4 - Employee social security tax withheld from the
sick pay.
- Box 5 - Sick pay subject to employee Medicare
tax.
- Box 6 - Employee Medicare tax withheld from the sick
pay.
- Box 13 (Boxes 12a-c on the 2001 Form W-2) - Any amount
not subject to Federal income tax because the employee contributed to
the sick pay plan (enter code J).
Sick Pay Paid by Third Party
The rules for a third party that is not your agent depend on
whether liability has been transferred as discussed under
Third-Party Payers of Sick Pay earlier.
To figure the due dates and amounts of its deposits of employment
taxes, a third party should combine:
- The liability for the wages paid to its own employees
and
- The liability for payments it made to all employees of all
its clients. This does not include liability transferred to the
employer.
Liability not transferred to the employer.
If the third party does not satisfy the requirements for
transferring liability for FUTA tax and the employer's part of the
social security and Medicare taxes, the third party reports the sick
pay on its own Forms 940 (or 940-EZ) and 941. In this situation, the
employer has no tax responsibilities for sick pay.
The third party must deposit social security, Medicare, FUTA, and
withheld income taxes using its own name and EIN. The third party must
give each employee to whom it paid sick pay a Form W-2 by January 31
of the following year. The Form W-2 must include the third party's
name, address, and EIN instead of the employer information. Otherwise,
the third party must complete Form W-2 as shown in Reporting sick
pay on Form W-2 below.
Note:
For 2001, the third party should check the "Third-party sick
pay" box in Box 13 of Form W-2.
Liability transferred to the employer.
Generally, if a third party satisfies the requirements for
transferring liability for the employer part of the social security
and Medicare taxes and for the FUTA tax, the following rules apply.
Deposits.
The third party must make deposits of withheld employee social
security and Medicare taxes and withheld income tax using its own name
and EIN. You must make deposits of the employer part of the social
security and Medicare taxes and the FUTA tax using your name and EIN.
In applying the deposit rules, your liability for these taxes begins
when you receive the third party's notice of sick pay payments.
Form 941.
The third party and you must each file Form 941. Line 9 of each
Form 941 must contain a special adjusting entry for social security
and Medicare taxes. These entries are required because the total tax
liability for social security and Medicare taxes (employee and
employer parts) is split between you and the third party.
- Employer. You must include third-party sick pay
on lines 2, 6a, and 7a of Form 941. (There are no entries for sick pay
on lines 3 through 5.) After completing line 8, subtract on line 9 the
employee social security and Medicare taxes withheld and deposited by
the third party. Enter that amount in the "Sick Pay" space
provided. If line 9 includes adjustments unrelated to sick pay, show
those amounts in the spaces provided and the total in the line 9 entry
space on the right.
- Third party. The third party must include on Form
941 the employee part of the social security and Medicare taxes (and
income tax, if any) it withheld. The third party does not
include on line 2 any sick pay paid as a third party but does
include on line 3 any income tax withheld. On line 6a, the third party
enters the total amount it paid subject to social security taxes. This
amount includes both wages paid to its own employees and sick pay paid
as a third party. The third party completes line 7a in a similar
manner. On line 9, the third party subtracts the employer part of the
social security and Medicare taxes that you must pay. The third party
enters the amount you must pay on line 9 in the "Sick Pay" space
provided. If line 9 includes adjustments unrelated to sick pay, the
third party shows those amounts in the spaces provided and the total
of all adjustments in the line 9 entry space.
Form 940 or 940-EZ.
You, not the third party, must prepare Form 940 or 940-EZ for sick
pay.
Third-party sick pay recap Forms W-2 and W-3.
The third party must prepare a "third-party sick pay recap"
Form W-2 and a "third-party sick pay recap" Form W-3. These
forms, previously called "dummy" forms, do not reflect sick pay
paid to individual employees, but instead show the combined amount of
sick pay paid to all employees of all clients of the third party. The
recap forms provide a means of reconciling the wages shown on the
third party's Form 941. However, see Optional rule for Form W-2
later. Do not file the recap Form W-2 and W-3 electronically or
on magnetic media.
The third party fills out the third-party sick pay recap Form W-2
as follows:
- Box b - Third party's EIN.
- Box c - Third party's name and address.
- Box e - "Third-Party Sick Pay Recap" in place of
the employee's name.
- Box 1 - Total sick pay paid to all employees.
- Box 2 - Any Federal income tax withheld from the sick
pay.
- Box 3 - Sick pay subject to employee social security
tax.
- Box 4 - Employee social security tax withheld from
sick pay.
- Box 5 - Sick pay subject to employee Medicare
tax.
- Box 6 - Employee Medicare tax withheld from the sick
pay.
The third party attaches the third-party sick pay recap Form W-2 to
a separate recap Form W-3, on which only boxes b, e, f, g, 1, 2, 3, 4,
5, 6, and 13 are completed. Enter "Third-Party Sick Pay Recap" in
box 13. Only the employer makes an entry in box 15 of Form W-3 (box 14
of the 2001 Form W-3).
Optional rule for Form W-2.
You and the third party may choose to enter into a legally binding
agreement designating the third party to be your agent for purposes of
preparing Forms W-2 reporting sick pay. The agreement must specify
what part, if any, of the payments under the sick pay plan is
excludable from the employees' gross incomes because it is
attributable to their contributions to the plan. If you enter into an
agreement, the third party prepares the actual Forms W-2, not the
third-party sick pay recap Form W-2 as discussed earlier, for each
employee who receives sick pay from the third party. If the optional
rule is used:
- The third party does not provide you with the sick pay
statement described below and
- You (not the third party) prepare third-party sick pay recap
Forms W-2 and W-3. These recap forms are needed to reconcile the sick
pay shown on your Form 941.
Sick pay statement.
The third party must furnish you with a sick pay statement by
January 15 of the year following the year in which the sick pay was
paid. The statement must show the following information about each
employee who was paid sick pay:
- The employee's name.
- The employee's SSN (if social security, Medicare, or income
tax was withheld).
- The sick pay paid to the employee.
- Any Federal income tax withheld.
- Any employee social security tax withheld.
- Any employee Medicare tax withheld.
Example of Figuring and Reporting Sick Pay
Dave, an employee, was seriously injured in a car accident on
January 1, 2000. Dave's last day of work was December 31, 1999. The
accident was not job related.
Key, an insurance company that was not an agent of the employer,
paid Dave $2,000 each month for 10 months, beginning in January 2000.
Dave submitted a Form W-4S to Key, requesting $210 be withheld from
each payment for Federal income tax. Dave received no payments from
Edgewood, his employer, from January 2000 through October 2000. Dave
returned to work in November 2000.
For the policy year in which the car accident occurred, Dave paid a
part of the premiums for his coverage, and Edgewood paid the remaining
part. The plan was, therefore, a "contributory plan." During the
3 policy years before the calendar year of the accident, Edgewood paid
70% of the total of the net premiums for its employees' insurance
coverage, and its employees paid 30%.
Social security and Medicare taxes.
For social security and Medicare tax purposes, taxable sick pay was
$8,400 ($2,000 per month x 70% = $1,400 taxable portion per
payment; $1,400 x 6 months = $8,400 total taxable sick pay).
Only the six $2,000 checks received by Dave from January through June
are included in the calculation. The check received by Dave in July
(the seventh check) was received more than 6 months after the month in
which Dave last worked.
Of each $2,000 payment Dave received, 30% ($600) is not subject to
social security and Medicare taxes because the plan is contributory
and Dave's aftertax contribution is considered to be 30% of the
premiums during the 3 policy years before the calendar year of the
accident.
FUTA tax.
Of the $8,400 taxable sick pay (figured the same as for social
security and Medicare taxes), only $7,000 is subject to the FUTA tax
because the FUTA contribution base is $7,000.
Income tax withholding.
Of each $2,000 payment, $1,400 ($2,000 x 70%) is subject to
voluntary income tax withholding. In accordance with Dave's Form W-4S,
$210 was withheld from each payment ($2,100 for the 10 payments made
during 2000).
Liability transferred.
For the first 6 months following the last month in which Dave
worked, Key was liable for social security, Medicare, and FUTA taxes
on any payments that constituted taxable wages. However, Key could
have shifted the liability for the employer part of the social
security and Medicare taxes (and for the FUTA tax) during the first 6
months by withholding Dave's part of the social security and Medicare
taxes, timely depositing the taxes, and notifying Edgewood of the
payments.
If Key shifted liability for the employer part of the social
security and Medicare taxes to Edgewood and provided Edgewood with a
sick pay statement, Key would not prepare a Form W-2 for Dave.
However, Key would prepare third-party sick pay recap Forms W-2 and
W-3. Key and Edgewood must each prepare Form 941. Edgewood must also
report the sick pay and withholding for Dave on Forms W-2, W-3, and
940.
As an alternative, the parties could have followed the optional
rule described under Optional rule for Form W-2 earlier.
Under this rule, Key would prepare Form W-2 even though liability for
the employer part of the social security and Medicare taxes had been
shifted to Edgewood. Also, Key would not prepare a sick pay statement,
and Edgewood, not Key, would prepare the recap Forms W-2 and W-3
reflecting the sick pay shown on Edgewood's Form 941.
Liability not transferred.
If Key did not shift liability for the employer part of the social
security and Medicare taxes to Edgewood, Key would prepare Forms W-2
and W-3 as well as Forms 941 and 940. In this situation, Edgewood
would not report the sick pay.
Payments received after 6 months.
The payments received by Dave in July through October are not
subject to social security, Medicare, or FUTA taxes, because they were
received more than 6 months after the last month in which Dave worked
(December 1999). However, Key must continue to withhold income tax
from each payment because Dave furnished Key a Form W-4S. Also, Key
must prepare Forms W-2 and W-3, unless it has furnished Edgewood with
a sick pay statement. If the sick pay statement was furnished, then
Edgewood must prepare Forms W-2 and W-3.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|