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Last Updated: 6/11/2018

Third Party Sick Pay

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

Do I need to withhold Minnesota income tax on third party sick pay?

It depends on who paid for the insurance that makes sick leave payments to the employee.

If your employees purchase their own sick pay insurance policy

Your employees' distributions are not taxable, including any disability payments. This is true whether they buy the policy independently or pay you for sick pay insurance (provided you do not pay the premiums). Do not provide your employees a tax statement for or withhold Minnesota income tax from sick leave payments. 

If you pay premiums for your employees’ sick pay insurance policy

Your Minnesota withholding requirements are outlined in the table below.
​If Then
​Your employee is under the mandatory retirement age ​You must withhold Minnesota income tax because the sick leave payments are considered wages. Report these payments and the tax withheld on federal Form W-2. ​
​You make sick leave payments directly to an employee
​A third-party agent makes sick leave payments on your behalf ​The third-party agent must withhold required taxes. The agent will use its own name and Minnesota Tax ID Number to report and deposit the tax withheld.
​Your employee is over the mandatory retirement age, receives a disability pension, or is on early retirement due to disability ​Do not withhold tax from the payments unless your employee requests it. Report these payments and any tax withheld on federal Form 1099-R.

For more information, see Internal Revenue Service (IRS) Publication 15-A on the IRS website.

Do I need to file federal Forms W-2 and 1099 with Minnesota?

Yes, if these forms report Minnesota income tax withheld. For more information on filing these forms with the Minnesota Department of Revenue, see Forms W-2/1099