7. Sick Pay Reporting Grand-Hotel OhridSpecial rules apply to the reporting of sick pay payments toemployees. How these payments are reported depends on whether thepayments are made by the employer or a third party, such as aninsurance company. Sick pay is usually subject to social security, Medicare, and FUTAtaxes. For exceptions, see Social Security, Medicare, and FUTATaxes on Sick Pay later. Sick pay also may be subject to eithermandatory or voluntary Federal income tax withholding, depending onwho pays it. See Income Tax Withholding on Sick Pay later. Sick Pay Sick pay generally means any amount paid under a plan because of anemployee's temporary absence from work due to injury, sickness, ordisability. It may be paid by either the employer or a third party,such as an insurance company. Sick pay includes both short- andlong-term benefits. It is often expressed as a percentage of theemployee's regular wages. Payments That Are Not Sick Pay Sick pay does not include the following payments: Disability retirement payments. Disabilityretirement payments are not sick pay and are not discussed in thissection. Those payments are subject to the rules for income taxwithholding from pensions and annuities. See section 9. Workers' compensation. Payments because of awork-related injury or sickness that are made under a workers'compensation law are not sick pay and are not subject to employmenttaxes. But see Workers' Compensation--Public Employeesin section 5. Medical expense payments. Payments under adefinite plan or system for medical and hospitalization expenses, orfor insurance covering these expenses, are not sick pay and are notsubject to employment taxes. Payments unrelated to absence from work. Accidentor health insurance payments unrelated to absence from work are notsick pay and are not subject to employment taxes. These includepayments for: Permanent loss of a member or function of the body, Permanent loss of the use of a member or function of thebody, or Permanent disfigurement of the body. Example. Donald was injured in a car accident and lostan eye. Under a policy paid for by Donald's employer, Delta InsuranceCo. paid Donald $5,000 as compensation for the loss of his eye.Because the payment was determined by the type of injury and wasunrelated to Donald's absence from work, it is not sick pay and is notsubject to employment taxes. Sick Pay Plan A sick pay plan is a plan or system established by an employerunder which sick pay is available to employees generally or to a classor classes of employees. A plan or system does not exist if benefitsare provided on a discretionary or occasional basis with merely anintention to aid particular employees in time of need. You have a sick pay plan or system if the plan is in writing or isotherwise made known to employees, such as by a bulletin board noticeor your long and established practice. Some indications that you havea sick pay plan or system include references to the plan or system inthe contract of employment, employer contributions to a plan, orsegregated accounts for the payment of benefits. black jack italianoDefinition of employer.The employer for whom the employee normally works, aterm used in the following discussion, is either the employer for whomthe employee was working at the time the employee became sick ordisabled or the last employer for whom the employee worked beforebecoming sick or disabled, if that employer made contributions to thesick pay plan on behalf of the sick or disabled employee. Note:Contributions to a sick pay plan through a cafeteria plan (bydirect employer contributions or salary reduction) are employercontributions unless they are aftertax employeecontributions (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 riskand is reimbursed on a cost-plus-fee basis for payment of sick pay andsimilar amounts. A third party may be your agent even if the thirdparty is responsible for determining which employees are eligible toreceive payments. For example, if a third party providesadministrative services only, the third party is your agent. If thethird party is paid an insurance premium and is not reimbursed on acost-plus-fee basis, the third party is not your agent. Whether aninsurance company or other third party is your agent depends on theterms of the agreement with you. A third party that makes payments of sick pay as your agent is notconsidered the employer and generally has no responsibility foremployment taxes. This responsibility remains with you. However, underan exception to this rule, the parties may enter into an agreementthat makes the third-party agent responsible for employment taxes. Inthis situation, the third-party agent should use its own name and EIN(rather than your name and EIN) for the responsibilities it hasassumed. cheap hotel in FaaborgThird party not employer's agent.A third party that makes payments of sick pay other than as anagent of the employer is liable for income tax withholding (ifrequested by the employee) and the employee part of the socialsecurity and Medicare taxes. The third party is also liable for theemployer part of the social security and Medicare taxes and the FUTAtax, unless the third party transfers this liability to the employerfor whom the employee normally works. This liability is transferred ifthe third party takes the following steps: Withholds the employee social security andMedicare taxes from the sick pay payments. Makes timely deposits of the employee socialsecurity and Medicare taxes. Notifies the employer for whom the employee normally worksof the payments on which employee taxes were withheld and deposited.The third party must notify the employer within the time required forthe third party's deposit of the employee part of the social securityand Medicare taxes. For instance, if the third party is a monthlyschedule depositor, it must notify the employer by the 15th day of themonth following the month in which the sick pay payment is madebecause that is the day by which the deposit is required to be made.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 athird-party insurer under an insurance contract with a multi-employerplan established under a collectively bargained agreement. If thethird-party insurer making the payments complies with steps 1 and 2above and gives the plan (rather than the employer) the requiredtimely notice described in step 3 above, then the plan (not thethird-party insurer) must pay the employer part of the social securityand Medicare taxes and the FUTA tax. Similarly, if, within 6 businessdays of the plan's receipt of notification, the plan gives notice tothe employer for whom the employee normally works, the employer (notthe plan) must pay the employer part of the social security andMedicare taxes and the FUTA tax. Reliance on information supplied by the employer.A third party that pays sick pay should request information fromthe employer to determine amounts that are not subject to employmenttaxes. Unless the third party has reason not to believe theinformation, it may rely on that information as to the followingitems: The total wages paid the employee during the calendaryear. The last month in which the employee worked for theemployer. The employee contributions to the sick pay plan made withaftertax dollars. The third party should not rely on statements regarding these itemsmade by the employee. Social Security, Medicare, and FUTA Taxes on Sick Pay Employer.If you pay sick pay to your employee, you must generally withholdemployee social security and Medicare taxes from the sick pay. Youmust timely deposit employee and employer social security and Medicaretaxes and FUTA tax. There are no special deposit rules for sick pay.See section 11 of Circular E for more information on the depositrules. Amounts not subject to social security, Medicare, or FUTAtaxes.The following payments, whether made by the employer or a thirdparty, are not subject to social security, Medicare, or FUTA taxes(different rules apply to income tax withholding): Payments after employee's death or disabilityretirement. Social security, Medicare, and FUTA taxes do notapply to amounts paid under a definite plan or system, as definedunder Sick Pay Plan earlier, on or after the termination ofthe employment relationship because of death or disabilityretirement. However, even if there is a definite plan or system, amounts paidto a former employee are subject to social security, Medicare, andFUTA taxes if they would have been paid even if the employmentrelationship had not terminated because of death or disabilityretirement. For example, a payment to a disabled former employee forunused vacation time would have been made whether or not the employeeretired on disability. Therefore, the payment is wages and is subjectto 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 thecalendar year of the employee's death is not subject to socialsecurity, Medicare, or FUTA taxes. (Also see Amounts not subjectto income tax withholding under Income Tax Withholding onSick Pay later.) Example. Sandra became entitled to sick pay on November30, 1999, and died December 26, 1999. On January 14, 2000, Sandra'ssick pay for the period from December 19 through December 26, 1999,was paid to her survivor. The payment is not subject to socialsecurity, Medicare, or FUTA taxes. Payments to an employee entitled to disabilityinsurance benefits. Payments to an employee when the employee isentitled to disability insurance benefits under section 223(a) of theSocial Security Act are not subject to social security and Medicaretaxes. This rule applies only if the employee became entitled to theSocial Security Act benefits before the calendar year in which thepayments are made, and the employee performs no service for theemployer during the period for which the payments are made. Thesepayments are subject to FUTA tax. Payments that exceed the applicable wage base.Social security and FUTA taxes do not apply to payments of sickpay that, when combined with the regular wages and sick pay previouslypaid to the employee during the year, exceed the applicable wage base.Because there is no Medicare tax wage base, this exception does notapply to Medicare tax. The social security tax wage base for 2000 is$76,200. The FUTA tax wage base is $7,000. Example. hoteles BledIf an employee receives $70,000 in wages froman employer in 2000 and then receives $10,000 of sick pay, only thefirst $6,200 of the sick pay is subject to social security tax. All ofthe sick pay is subject to Medicare tax. None of the sick pay issubject to FUTA tax. See Example of Figuring and Reporting SickPay later. Payments after 6 months absence from work. Socialsecurity, Medicare, and FUTA taxes do not apply to sick pay paid morethan 6 calendar months after the last calendar month in which theemployee worked. Example 1. Ralph's last day of work before he becameentitled to receive sick pay was December 10, 1999. He was paid sickpay for 9 months before his return to work on September 7, 2000. Sickpay paid to Ralph after June 30, 2000, is not subject to socialsecurity, 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 February16, 2000. Because the 6-month period begins again in March, only thesick pay paid to Ralph after August 31, 2000, is exempt from socialsecurity, Medicare, and FUTA taxes. Payments attributable to employee contributions.Social security, Medicare, and FUTA taxes do not apply topayments, or parts of payments, attributable to employee contributionsto a sick pay plan made with aftertax dollars.(Contributions to a sick pay plan made on behalf of employees withemployees' pretax dollars under a cafeteria plan are employercontributions.) Group policy. If both the employer and the employeecontributed to the sick pay plan under a group insurance policy,figure the taxable sick pay by multiplying it by the percentage of thepolicy's cost that was contributed by the employer for the 3 policyyears before the calendar year in which the sick pay is paid. If thepolicy has been in effect fewer than 3 years, use the cost for thepolicy years in effect or, if in effect less than 1 year, a reasonableestimate 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 during2000. Key Insurance Company paid Allan $2,000 sick pay for each monthof his absence under a policy paid for by contributions from bothEdgewood and its employees. All the employees' contributions were paidwith aftertax dollars. For the 3 policy years before 2000, Edgewoodpaid 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'scontributions, $1,400 ($2,000 70%) of each payment made toAlan is taxable sick pay. The remaining $600 of each payment that isdue to employee contributions is not taxable sick pay and is notsubject to employment taxes. Also, see Example of Figuring andReporting Sick Pay later. Income Tax Withholding on Sick Pay The requirements for income tax withholding on sick pay and themethods for figuring it differ depending on whether the sick pay ispaid 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 incometax withholding. An employer or agent paying sick pay generallydetermines the income tax to be withheld based on the employee's FormW-4. The employee cannot choose how much will be withheld by givingyou or your agent a Form W-4S, Request for Federal TaxWithholding From Sick Pay. Sick pay paid by an agent is treated assupplemental wages. If the agent does not pay regular wages to theemployee, 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 notsubject to mandatory income tax withholding. However, anemployee may elect to have income tax withheld by submitting Form W-4Sto the third party. If Form W-4S has been submitted, the third party should withholdincome tax on all payments of sick pay made 8 or more days afterreceiving the form. The third party may, at its option, withholdincome tax before 8 days have passed. The employee may request on Form W-4S to have a specific wholedollar amount withheld. However, if the requested withholding wouldreduce any net payment below $10, the third party should not withholdany income tax from that payment. The minimum amount of withholdingthat the employee can specify is $20 a week. Withhold from all payments at the same rate. For example, if $25 iswithheld from a regular full payment of $100, then $20 (25%) should bewithheld from a partial payment of $80. Amounts not subject to income tax withholding.The following amounts, whether paid by you or a third party, arenot wages subject to income tax withholding. Payments after the employee's death. Sick paypaid to the employee's estate or survivor at any time after theemployee's death is not subject to income tax withholding, regardlessof who pays it. Payments attributable to employee contributions.Payments, or parts of payments, attributable to employeecontributions made to a sick pay plan with aftertax dollars are notsubject to income tax withholding. For more information, see thecorresponding discussion in Amounts not subject to socialsecurity, Medicare, or FUTA taxes earlier. Depositing and Reporting This section discusses who is liable for depositing socialsecurity, Medicare, FUTA, and withheld income taxes on sick pay. Thesetaxes must be deposited under the same rules that apply to deposits oftaxes on regular wage payments. See Circular E for information on thedeposit rules. This section also explains how sick pay should be reported on FormsW-2, W-3, 940 or 940-EZ, and 941. For additional information coveringspecific line numbers and box numbers on these forms, seeReporting Sick Pay on Forms 941, W-2, and W-3 later. Sick Pay Paid by Employer or Agent If you or your agent (defined earlier) make sick pay payments, youdeposit taxes and file Forms W-2, W-3, 940 or 940-EZ, and 941 underthe same rules that apply to regular wage payments. However, the agreement between the parties may require your agentto carry out responsibilities that would otherwise have been borne byyou. 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 asingle Form W-2 for each employee, or you may prepare separate FormsW-2 for each employee, one reporting sick pay and the other reportingregular wages. A Form W-2 must be prepared even if all the sick pay isnontaxable (see Box 13 below in the list of informationthat must be included on Form W-2). All Forms W-2 must be given to theemployees by January 31. The Form W-2 filed for the sick pay must include the employer'sname, address, and EIN; the employee's name, address, and SSN; and thefollowing information: Box 1 - Sick pay the employee must include inincome. Box 2 - Any Federal income tax withheld from the sickpay. Box 3 - Sick pay subject to employee social securitytax. Box 4 - Employee social security tax withheld from thesick pay. Box 5 - Sick pay subject to employee Medicaretax. Box 6 - Employee Medicare tax withheld from the sickpay. Box 13 - Any amount not subject to Federal income taxbecause the employee contributed to the sick pay plan (enter code J).If you issue a separate Form W-2 for sick pay, also enter "Sick Pay"in box 13. Sick Pay Paid by Third Party The rules for a third party that is not your agent depend onwhether liability has been transferred as discussed underThird-Party Payers of Sick Pay earlier. To figure the due dates and amounts of its deposits of employmenttaxes, a third party should combine: The liability for the wages paid to its own employeesand The liability for payments it made to all employees of allits clients. This does not include liability transferred to theemployer. Liability not transferred.If the third party does not satisfy the requirements fortransferring liability for FUTA tax and the employer's part of thesocial security and Medicare taxes, the third party reports the sickpay on its own Forms 940 (or 940-EZ) and 941. In this situation, theemployer has no tax responsibilities for sick pay. The third party must deposit social security, Medicare, FUTA, andwithheld income taxes using its own name and EIN. The third party mustgive each employee to whom it paid sick pay a Form W-2 by January 31of the following year. The Form W-2 must include the third party'sname, address, and EIN instead of the employer information. Otherwise,the third party must complete Form W-2 as shown in Reporting sickpay on Form W-2 on this page. Liability transferred.Generally, if a third party satisfies the requirements fortransferring liability for the employer part of the social securityand Medicare taxes and for the FUTA tax, the following rules apply. Deposits.The third party must make deposits of withheld employee socialsecurity and Medicare taxes and withheld income tax using its own nameand EIN. You must make deposits of the employer part of the socialsecurity and Medicare taxes and the FUTA tax using your name and EIN.In applying the deposit rules, your liability for these taxes beginswhen 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 eachForm 941 must contain a special adjusting entry for social securityand Medicare taxes. These entries are required because the total taxliability for social security and Medicare taxes (employee andemployer parts) is split between you and the third party. Employer. You must include third-party sick payon lines 2, 6a, and 7a of Form 941. (There are no entries for sick payon lines 3 through 5.) After completing line 8, subtract on line 9 theemployee social security and Medicare taxes withheld and deposited bythe third party. Enter that amount in the "Sick Pay" spaceprovided. If line 9 includes adjustments unrelated to sick pay, showthose amounts in the spaces provided and the total in the line 9 entryspace on the right. Third party. The third party must include on Form941 the employee part of the social security and Medicare taxes (andincome tax, if any) it withheld. The third party does notinclude on line 2 any sick pay paid as a third party but doesinclude on line 3 any income tax withheld. On line 6a, the third partyenters the total amount it paid subject to social security taxes. Thisamount includes both wages paid to its own employees and sick pay paidas a third party. The third party completes line 7a in a similarmanner. On line 9, the third party subtracts the employer part of thesocial security and Medicare taxes that you must pay. The third partyenters the amount you must pay on line 9 in the "Sick Pay" spaceprovided. If line 9 includes adjustments unrelated to sick pay, thethird party shows those amounts in the spaces provided and the totalof 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 sickpay. 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. Theseforms, previously called "dummy" forms, do not reflect sick paypaid to individual employees, but instead show the combined amount ofsick pay paid to all employees of all clients of the third party. Therecap forms provide a means of reconciling the wages shown on thethird party's Form 941. However, see Optional rule for Form W-2later. Do not file the recap Form W-2 and W-3 on magnetic media. The third party fills out the third-party sick pay recap Form W-2as follows: Box b - Third party's EIN. Box c - Third party's name and address. Box e - "Third-Party Sick Pay Recap" in place ofthe employee's name. Box 1 - Total sick pay paid to all employees. Box 2 - Any Federal income tax withheld from the sickpay. Box 3 - Sick pay subject to employee social securitytax. Box 4 - Employee social security tax withheld fromsick pay. Box 5 - Sick pay subject to employee Medicaretax. Box 6 - Employee Medicare tax withheld from the sickpay. The third party attaches the third-party sick pay recap Form W-2 toa 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" inbox 13. The third party makes no entry in box 15 of the recap FormW-3. You provide information in box 15 of your Form W-3. Optional rule for Form W-2.You and the third party may choose to enter into a legally bindingagreement designating the third party to be your agent for purposes ofpreparing Forms W-2 reporting sick pay. The agreement must specifywhat part, if any, of the payments under the sick pay plan isexcludable from the employees' gross incomes because it isattributable to their contributions to the plan. If you enter into anagreement, the third party prepares the actual Forms W-2, not thethird-party sick pay recap Form W-2 as discussed earlier, for eachemployee who receives sick pay from the third party. If the optionalrule is used: The third party does not provide you with the sick paystatement described below, and You (not the third party) prepare third-party sick pay recapForms W-2 and W-3. These recap forms are needed to reconcile the sickpay shown on your Form 941. Sick pay statement.The third party must furnish you with a sick pay statement byJanuary 15 of the year following the year in which the sick pay waspaid. The statement must show the following information about eachemployee who was paid sick pay: The employee's name. The employee's SSN (if social security, Medicare, or incometax 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 Alan, an employee, was seriously injured in a car accident onJanuary 1, 1999. Alan's last day of work was December 31, 1998. Theaccident was not job related. Key, an insurance company that was not an agent of the employer,paid Alan $2,000 each month for 10 months, beginning in January 1999.Alan submitted a Form W-4S to Key, requesting $210 be withheld fromeach payment for Federal income tax. Alan received no payments fromEdgewood, his employer, from January 1999 through October 1999. Alanreturned to work in November 1999. For the policy year in which the car accident occurred, Alan paid apart of the premiums for his coverage, and Edgewood paid the remainingpart. The plan was, therefore, a "contributory plan." During the3 policy years before the calendar year of the accident, Edgewood paid70% of the total of the net premiums for its employees' insurancecoverage, 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 70% = $1,400 taxable portion perpayment; $1,400 6 months = $8,400 total taxable sick pay).Only the six $2,000 checks received by Alan from January through Juneare included in the calculation. The check received by Alan in July(the seventh check) was received more than 6 months after the month inwhich Alan last worked. Of each $2,000 payment Alan received, 30% ($600) is not subject tosocial security and Medicare taxes because the plan is contributoryand Alan's aftertax contribution is considered to be 30% of thepremiums during the 3 policy years before the calendar year of theaccident. FUTA tax.Of the $8,400 taxable sick pay (figured the same as for socialsecurity and Medicare taxes), only $7,000 is subject to the FUTA taxbecause the FUTA contribution base is $7,000. Income tax withholding.Of each $2,000 payment, $1,400 ($2,000 70%) is subject tovoluntary income tax withholding. In accordance with Alan's Form W-4S,$210 was withheld from each payment ($2,100 for the 10 payments madeduring 1999). Liability transferred.For the first 6 months following the last month in which Alanworked, Key was liable for social security, Medicare, and FUTA taxeson any payments that constituted taxable wages. However, Key couldhave shifted the liability for the employer part of the socialsecurity and Medicare taxes (and for the FUTA tax) during the first 6months by withholding Alan's part of the social security and Medicaretaxes, timely depositing the taxes, and notifying Edgewood of thepayments. If Key shifted liability for the employer part of the socialsecurity and Medicare taxes to Edgewood and provided Edgewood with asick pay statement, Key would not prepare a Form W-2 for Alan.However, Key would prepare third-party sick pay recap Forms W-2 andW-3. Key and Edgewood must each prepare Form 941. Edgewood must alsoreport the sick pay and withholding for Alan on Forms W-2, W-3, and940. As an alternative, the parties could have followed the optionalrule described under Optional rule for Form W-2 earlier.Under this rule, Key would prepare Form W-2 even though liability forthe employer part of the social security and Medicare taxes had beenshifted to Edgewood. Also, Key would not prepare a sick pay statement,and Edgewood, not Key, would prepare the recap Forms W-2 and W-3reflecting the sick pay shown on Edgewood's Form 941. Liability not transferred.If Key did not shift liability for the employer part of the socialsecurity and Medicare taxes to Edgewood, Key would prepare Forms W-2and W-3 as well as Forms 941 and 940. In this situation, Edgewoodwould not report the sick pay. Payments received after 6 months.The payments received by Alan in July through October are notsubject to social security, Medicare, or FUTA taxes, because they werereceived more than 6 months after the last month in which Alan worked(December 1998). However, Key must continue to withhold income taxfrom each payment because Alan furnished Key a Form W-4S. Also, Keymust prepare Forms W-2 and W-3, unless it has furnished Edgewood witha sick pay statement. If the sick pay statement was furnished, thenEdgewood must prepare Forms W-2 and W-3.