HR Support on Employee Sick Pay Rights

Editor's Note: Who is responsible for taxing and reporting sick pay - employer or third party?

Rena PirsosOverview: Sick pay is usually provided by employers so that employees do not lose wages when they are absent from work because of brief minor illnesses, such as a cold or the flu. This type of sick pay is simply wages subject to federal income tax (FIT), Social Security and Medicare (FICA) tax, and federal unemployment (FUTA) tax when paid.

Employers also commonly provide sick pay under a plan for lengthier absences, either as short-term or long-term disability pay, which is paid either by the employer or a third party such as an insurance company. The portion of such benefits that can be attributed to employee contributions made with after-tax dollars are not taxable income to the employee. Benefits that can be attributed to employee pre-tax contributions or employer contributions are included in the employee's taxable income and may be taxable for FIT, FICA and FUTA. If both the employer and employee contribute, the benefits are taxable only to the extent of the employer's contribution.

However, employers sometimes get confused as to which party is responsible for withholding and paying the taxes on the taxable portion of the payments. It depends on several factors:

  • Is the employer's plan self-insured or administered by a third party?
  • If administered by a third party, is the third party an agent of the employer?
  • Which party pays the sick pay - the employer, its agent, or other third party?
  • Which party has the insurance risk?
  • Which party paid the insurance premiums?
  • Is the employee on temporary or permanent disability?

The answers to these questions will help employers sort out all the variables in order to more easily make the determination.

Author: Rena Pirsos, JD, Legal Editor

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