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Third-Party Sick Pay

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You may need to withhold Minnesota tax on third-party sick pay employees receive for absences 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.

Third-Party Sick Pay Requirements

Withholding tax requirements on sick leave payments depend on who paid for the insurance policy.

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 sick leave payments or withholding Minnesota income tax from them. 
 

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

Your Minnesota withholding requirements depend on certain factors.
 
​If​Then
​You make sick leave payments directly to an employee or through an agent​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.
​A third-party (except your agent) makes sick leave payments on your behalfThe third-party must withhold required taxes. The third party will use its own name and Minnesota Tax ID Number to report and deposit the tax withheld.

 You may enter an agreement that makes the third-party agent responsible for employment taxes, federal Form W-2 submission, or both. For details, see IRS Publication 15-A.

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

Yes, if these forms report Minnesota income tax withheld. For details on filing these forms, see Forms W-2/1099. 

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