Question for the client:
1) Who is issuing W2 for sick pay? (Notate this in the earning description field)
2) What taxes will be withheld (Employer)?
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 other than as an agent of the employer is liable for federal income tax withholding (if requested by the employee) and the employee part of the social security and Medicare taxes.
There are 3 different types of third party sick codes that can be set up.
1. How to setup a Third Party Sick Pay earning code that will be reported on W2
Navigate to: Company Settings > Payroll Setup > Earning Codes
If the code isn’t already setup on the company, click "Add New Earning Code" in the upper right corner.
In the Roll up Earning box, select “3rd Party Sick Pay (EE & ER Taxable, EE Paid by 3rd party)”. You should now see this box:
Select "OK"
Rename the earning code, if you'd like, and double-check the following W2 settings:
Click "Save"
In the tax settings box, click "Add Tax Setting"
Click "Select Taxes".
For Federal taxes, Third Party Sick Pay is taxable for FUTA, FIT, and FICA. Code accordingly:
Each state’s income tax, local tax, and worker’s compensation taxation varies – get the taxability from the client.
This is the most common 3rd Party Sick option. For how to set up earning codes if employee and employer are not taxable, or if PayNW is NOT producing the W2, but we need to calculate and pay ER taxes, please see bottom of this knowledge base, below inputting into payroll.
How to input in payroll
If the client does not already have a Third Party Sick pay statement created, you will need to create one. Third Party Sick Pay must always be processed on a 3rd Party Sick Pay PST type. It cannot be combined with any other PST type or it will not record correctly on the 941.
When processing a Third Party Sick payment, select “Supplemental Payroll Type” from the “View All Payrolls” screen
On the applicable employee, use the 3rd Party Sick Pay statement type
Select the 3rd Party Sick Pay (EE & ER Taxable, EE Paid by 3rd party) earnings code, and enter the amount paid to the employee by the 3rd party provider
Click "Utilities" in the upper right corner and select "Tax Overrides"
Make adjustments to FIT if the employee elected to have FIT withheld.
NOTE: When FIT withholding is recorded, send email to Tax when payroll is finalized and include copy of recap showing 3PSP.
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2. How to setup a Third Party Sick Pay earning code that will NOT be reported on W2, but we need to calculate/pay ER taxes.
Navigate to: Company Settings > Payroll Setup > Earning Codes
If the code isn’t already setup on the company, click "Add New Earning Code" in the upper right corner.
In the Roll up Earning box, select “3rd Party Sick Pay (EE Non-Taxable, ER Taxable)”. You should now see this box:
Select "OK"
Rename the earning code, if you'd like, and double-check the following W2 settings:
Click "Save"
In the tax settings box, click "Add Tax Setting"
Click "Select Taxes".
For Federal taxes, Third Party Sick Pay is taxable for FUTA, FIT, and FICA. Code accordingly:
Each state’s income tax, local tax, and worker’s compensation taxation varies – get the taxability from the client.
3. How to setup a Third Party Sick Pay earning code that is non-taxable for both EE and ER.
Navigate to: Company Settings > Payroll Setup > Earning Codes
If the code isn’t already setup on the company, click "Add New Earning Code" in the upper right corner.
In the Roll up Earning box, select “3rd Party Sick Pay (EE and ER Non-Taxable)”. You should now see this box:
Select "OK"
Rename the earning code, if you'd like, and double-check the following W2 settings:
Click "Save"
In the tax settings box, click "Add Tax Setting"
Click "Select Taxes".
Since this is a non-taxable earning, all should show as Exempt:
