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Last Updated: 8/21/2017

Third Party Sick Pay

An employee may receive sick pay during a temporary absence from work due to injury, sickness or disability. Sick pay includes both short- and long-term benefits. It is often expressed as a percentage of the employee's regular wages.

The taxability of sick pay depends on who paid for the insurance that makes sick leave payments to the employee.
 

Individual-paid Insurance

When individuals purchase their own sick pay insurance policy, none of the distributions they receive – including disability payments -- are taxable. This is true whether an individual buys the policy independently or pays for sick pay insurance through an employer (provided the employer does not pay the premium).
 
Individuals who buy their own policy should not receive a tax statement for the sick pay, and there is no tax withholding on the payments.

 

Employer-paid Insurance

When an employer pays the premiums for a sick pay insurance policy, the distributions are taxable as outlined below:
 
  • If the employee is under the mandatory retirement age, the payments generally are reported on Form W-2, Wage and Tax Statement. For withholding purposes the funds are considered wages, and tax is withheld on the payment.
  • If the employee is over the mandatory retirement age, receives a disability pension or is on early retirement due to disability, the payments are reported on Form 1099R, Distributions. Minnesota tax should not be withheld unless requested by the person receiving the benefits.
  • If the employer (or its agent) makes sick leave payments to an employee, they follow the same rules that apply to regular wage payments. The employer deposits any withheld taxes and reports them on W-2 forms and quarterly returns.
  • Some sick pay insurance policies may require the insurer – or another third party -- to make sick leave payments on behalf of the employer. In these cases, the third-party agent must withhold any required taxes and use its own name and Minnesota tax ID number to report and deposit the amount withheld.
  • See IRS Publication 15-A, Employer’s Supplemental Tax Guide to Circular E.

For more information on how to file W-2s, see I need to file Form(s) W-2/1099