- REFER TO IRS PUBLICATION 15-A FOR DETAILS REGARDING SICK PAY REPORTING: IRS Website
- Sick pay generally refers to 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 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.
- 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.
- 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 the employer. 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 the employer's name and EIN) for the responsibilities that it has assumed.
- Sick pay is usually subject to FICA, Medicare, and FUTA taxes. Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. (See www.irs.gov for more information regarding Sick Pay and exceptions).
- The requirements for federal 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, or
- A third party that is not the employer's agent.
(See IRS Website for definitions and explanation on federal tax withholding requirements).
- In order to ensure the correct processing of third party sick pay, the employer must know whether the sick pay is subject to employment taxes. FICA (Social security) and Medicare taxes do not apply to payments, or parts of payments, attributable to employee contributions to a sick pay plan made with after-tax dollars. Contributions to a sick pay plan made on behalf of employees with employees' pre-tax dollars under a cafeteria plan are considered employer contributions and are subject to FICA and Medicare taxes.
- If the sick payments are not subject to employment taxes, the amount will only need to be added to the employee's W-2 box 12J. See section below entitled: Third Party Sick Pay – Not Subject to Employment Taxes
- If sick payments are subject to employment taxes, the gross sick pay amount must be added to taxable wages, and the amount of any Federal tax withheld must be added to the employee's W-2 master on the F/W 3rd Party field.
- The F/W 3rd party Sick pay field is populated based on who pays the sick pay as stated above
- The Third-Party Sick Pay box is not checked if the employer pays under self-insured plan, but should be checked if the Third-Party insurer makes the payments
- Please refer to irs.gov and Publication 15-A for more information
- If Box 13 Third-Party Sick should be checked, access the appropriate MMREF W2 Employee Masters after loading W-2 amounts, and enter the amount of all FEDERAL taxes withheld (Federal, FICA, and Medicare) in the F/W Third-Party field.
See section below entitled: Third Party Sick Pay – Subject to Employment Taxes
Third Party Sick Pay - Not Subject to Employment Taxes
- HR → Payroll → Setup → Deductions → Deduction Descriptions
- Review the Deductions to see if one for Third Party Sick Pay already exists from previous Third Party Sick Pay reporting. (NOTE: this deduction should not be confused with standards that exist for 3rd Party FICA and MEDICARE reporting).
- Click on the + to add a new Deduction Description for Third Party Sick Pay, if one doesn't exist, and follow the setup below.
Type Tab
FIELDS | Opt. | Rec. | Req. | Description |
|---|---|---|---|---|
Deduction ID | — | — | ♦ | Create a Deduction Description ID for Third Party Sick Pay |
Deduction Type | — | — | ♦ | Can use a Type such as Voluntary - this deduction will never process in a payroll, so any type can be used |
Vendor ID | — | — | ♦ | Choose a Vendor ID - this deduction will never process in a payroll, so the organization's Vendor ID can be used |
Vendor Address | — | — | ♦ | Pull in the Remit Address associated with the Vendor ID |
Employer ID | — | — | ♦ | Use the drop-down to pick the appropriate Employer ID |
W-2 Deduction Type | — | — | ♦ | Sick Pay - this will ensure the sick pay amount entered will appear in the appropriate W-2 box |
Opt. = Optional Rec. = Recommended Req. = Required | ||||
Flags Tab
| FIELDS | Opt. | Rec. | Req. | Description |
|---|---|---|---|---|
| Reduce Net | — | — | ♦ | Must be set to true |
| Opt. = Optional Rec. = Recommended Req. = Required | ||||
- HR → Payroll → Personnel Demographics → locate employee
- Add the deduction to the employee. Do not activate the deduction.
- Go to Payroll → Maintenance → Adjustments → Change Payroll Deduction Earnings / Amounts
| FIELDS | Opt. | Rec. | Req. | Description |
|---|---|---|---|---|
| Personnel ID | — | — | ♦ | Browse for the employee that received sick pay |
| Job Number | — | — | ♦ | Browse for the appropriate job |
| Deduction Description ID | — | — | ♦ | Browse for the Third Party Sick Pay deduction |
| Calendar Year | — | — | ♦ | Enter the calendar year that the sick pay should be applied to |
| Calendar Month | — | — | ♦ | Enter the calendar month that the sick pay should be applied to |
| Fiscal Year | — | — | ♦ | Enter the fiscal year that the sick pay should be applied to |
| Fiscal Month | — | — | ♦ | Enter the fiscal month that the sick pay should be applied to |
| Adjustment (over Gross column) | — | — | ♦ | Enter the amount of the sick pay; this will add the amount to the Deduction Gross Calendar Summary |
| Adjustment (over Amount column) | — | — | ♦ | Enter the amount of the sick pay; this will add the amount to the Deduction Amount Calendar Summary |
| Adjustment (over Sheltered column) | — | — | ♦ | Leave as 0 |
| Opt. = Optional Rec. = Recommended Req. = Required | ||||
- When the adjustment is saved, the totals will update at the bottom of the screen.
- The Load W-2s process will copy the Adjustment amount entered for sick pay to the Employee W-2 Master under Box 12J.
- The Third Party Sick Pay check box (Box 13) will automatically be checked.
Third Party Sick Pay - Subject to Employment Taxes: FICA and MEDICARE Withheld
- NOTE: If the third party did not withhold the employee's portion of FICA and Medicare and the amounts need to be withheld from the employee, do not use this process. Please see instructions for FICA and MEDICARE not withheld.
- NOTE This process only includes FICA and Medicare and if Federal tax was withheld from the 3rd party, the amount must be entered directly on the employee's W-2 Master on the Boxes 1-11 Amounts tab in the F/W 3rd Party Sick Pay field
- Modules → HR → Payroll → Setup → Deductions → Deduction Descriptions
- Review the Deductions to verify standards exist: FICA-3RD PARTY SICK PAY and MEDICARE-3RD PARTY SICK PAY (These deductions should have Expensed, Liability and Pay Withholding set to False; since they are created via program updates, no changes should be needed for these deductions.)
- Go to HR → Payroll → Personnel Demographics → locate employee
- Add both the FICA-3RD PARTY SICK PAY and MEDICARE-3RD PARTY SICK PAY deductions to the employee. Do not activate the deductions.
- Modules → HR → Payroll → Maintenance → 3rd Party Sick Pay
- This process is for recording FICA and Medicare tax withheld by a Third Party for sick pay (disability) as well as increasing taxable earnings as a result of the taxable payment.
- The employer's share of FICA and Medicare can also be recorded and expensed via this process as well as adding Federal earnings.
- Employer tax amounts will be included in the Deduction Accounts and appear on the Outstanding Amounts Report to pay in Vendor Withholding.
- A Pay ID must be created for this process and cannot contain any gross pay.
- The Pay ID should reflect the calendar year and month when the amounts should affect the 941 and W2; fiscal year and month determine when the employer deductions will be expensed.
- The amounts withheld by the third party should not use the employee's normal FICA and Medicare deductions; Instead use the FICA-3RD PARTY SICK PAY and MEDICARE-3RD PARTY SICK PAY deductions.
Add 3rd Party Sick Pay Benefits
| FIELDS | Opt. | Rec. | Req. | Description |
|---|---|---|---|---|
| Employee and Employer Totals | — | — | — | These amounts will automatically populate when benefits are entered and saved |
| Pay Identification | — | — | ♦ | Load Pay ID created for 3rd Party Sick Pay Benefits |
| Personnel ID | — | — | ♦ | Browse for the employee that received sick pay |
| Job Number | — | — | ♦ | Browse for the appropriate job |
| Deduction Description ID | — | — | ♦ | Browse for the tax deduction for which wages and amounts (if applicable) need to be entered (ex. FICA-3RD PARTY SICK PAY, FICA-M, MEDICARE-3RD PARTY SICK PAY , MEDICARE-M, Federal, State *** Do NOT select the employee's normal FICA or MEDICARE deductions) |
| Deduction Type | — | — | — | Will populate according to the type set up on the Deduction Description ID selected – Deduction Types must be FICA , FICA-M, MEDICARE, MEDICARE-M, FEDERAL, STATE or LOCAL |
| Increase Taxable Earnings By: | — | — | ♦ | Check boolean to increase taxable wages for Deduction Description ID selected and type in amount of increase (should be the amount of sick pay paid to the employee, and, be the same amount for each Deduction ID) |
| Employer Tax Amount | — | — | ♦ | Field will be available to add employer amount if Deduction Description ID selected is employer paid; Add amount for the employer's share of tax for sick pay |
| Withheld Tax Amount | — | — | ♦ | Field will be available to add employee amount if Deduction Description ID selected is employee paid; Add amount of employee tax paid by the third party |
| Opt. = Optional Rec. = Recommended Req. = Required | ||||
- Click on Save after each deduction is added and the entry will display in the window above the form.
- Once all entries are made, click on Cancel and run the 3rd Party Sick Pay Audit trail and set flags.
- If any entry is incorrect, whether flags have been set or not, return to the 3rd Party Sick Pay menu and run the Undo 3rd Party Sick Pay Benefits. Range on Personnel ID, if only one employee is incorrect, so all employees are not undone. For the employee undone, all entries will need to be re-entered.
- If the entries are correct, after setting flags on the Audit Trail, run the Deduction Register and set flags.
- Continue on the main payroll task menu beginning with Make Transactions then run Distribution, Update Payroll History and Post Activity.
- When finished, return to the employee and ensure that the FICA-3RD PARTY SICK PAY and MEDICARE-3RD PARTY SICK PAY deductions are not active.
Third Party Sick Pay – Subject to Employment Taxes: FICA and MEDICARE Not Withheld
- The steps below should be used if the employee's portion of FICA and Medicare were not withheld from the third party sick pay amount:
- Amounts that need to be collected from the employee for FICA and Medicare should be entered on the employee's FICA and MEDICARE deductions in the Correcting Amount field to compute in the next payroll.
- After the employee's portion of FICA and Medicare are collected in the completed payroll, taxable wages for Federal, State, FICA, FICA-M, Medicare and Medicare-M should be increased by the amount of the sick pay using the Adjustments → Change Payroll Deductions / Earnings Amounts process.
- When entering the increase of taxable wages on the Change Payroll Deductions / Earnings Amounts process, the boolean that reads Adjust Gross in Pay Master should be selected (marked as true) and the Pay ID where the employee portion of FICA and Medicare was collected, should be selected.
- No withholding amounts should be entered on the Change Payroll Deductions / Earnings Amounts process, only taxable gross wages should be entered.