Third Party Sick Pay

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Third-Party Sick Pay is pay that an employee receives from a third party (insurance company or trust) for time off work due to illness or injury.  These payments are sometimes known as short-term disability payments.  The third party is liable for federal income tax withholding (if requested by the employee) and the employee portion of the Social Security and Medicare taxes.  The third party is also liable for the employer portion of the Social Security and Medicare taxes, unless the third party transfers this liability to the employer.  In this discussion, the liability for the employer portion of taxes has been transferred to the employer therefore the wages must be reported by the employer on the 941, 940, and W-2. ** Be sure to review the IRS publication 15A and your state's payroll guide for a complete definition of what constitutes Third-Party Sick Pay.  Contact your company's CPA for more information on reporting Third Party Sick Pay.

 

 

Record Taxable Third-Party Sick Pay:

 

1. In the Ledger > Chart of Accounts, create an expense account named 'Third Party Sick Pay'.  The net entries into this account should equal the total of the employer paid taxes on the (if the agreement transfers this liability to the employer).

 

2. In the Payroll > Controls, create a department code labeled 'Third Party Sick Pay', or something similar, and link the new expense account that was created in step 1 to the gross pay and the burden account fields.  Do not link this department code to a workers comp code.

 

3. In the Payroll > Properties, create a miscellaneous pay labeled '3PSick', or something similar.

 

•Check the W-2 box.

•Although you can mark this item as exempt from the various taxes, it is highly recommended that you do NOT do this unless you simply do not pay a particular tax (such as State Disability Insurance) in your state.  Checking a tax box will prevent the system from including the sick pay as part of 'Subject Wages' for this item.  If a tax amount, such as FWH, should not be calculated on the sick pay, then the tax amount can be manipulated during the processing of the payroll check.

•Exempt this pay from workers comp and union accruals.

 

4. In the Payroll > Properties, create a miscellaneous deduction labeled '3PSick', or something similar.

 

•This deduction should have its own accumulator whenever possible to make reconciliation easier during the year.

•If the deduction has its own accumulator, then link the new expense account that was created in step 1 to this miscellaneous deduction.  If you have to share the accumulator with another deduction that has a different default g/l account, then the Local Deduction Code in Step 5 will be used to direct the deduction to the proper g/l account.  

 

5. In the Payroll > Controls, create a local deduction code labeled '3rd Party Sick Pay', or something similar.

 

•Link the code to the new expense account that was created in Step 1.

•You may optionally link the insurance company that is administrating the plan in the Collection Agency field.

•Enter 100 in the Deduct Rate field and select '% of Disposable' in the Deduct Type field.

 

This deduction is going to be used to reflect the net pay made to the employee by the insurance company.  This amount will be posted to the same account as the gross wages and payroll burden.  

 

•Link the code to the miscellaneous deduction accumulator that was established in Step 4.

 

6.In the Payroll > Employees screen:

 

•Edit the employee record and link the local deduction code that was created in Step 5 to the Deduct Tab.  

•Enable the 'Override Auto Tax Calcs' option on the Fed Tab.

•Check the '3rd Party Pay' option in the Box 13 info section on the Fed Tab.

 

7.Enter a payroll check.  This record can be created in a separate payroll batch by itself or it can be included in your normal payroll batch with all the other employees as long as you don't mind that the system will auto assign a check number for you.  The check number can be changed on this one record using the Reprint Checks option before posting the batch.

 

•In the Enter/Update Time Cards screen:

 

•Select transcode 51 through 56 (misc pay NOT withheld) that is related to the 3rd Party Sick Pay item that was established in Step 3.  

•Enter the amount of the gross pay.  

•Select the new department code that was created in Step 2.  

•Click Save.  

•The system will add any misc pays or deductions found in the employee file. Delete all of these items from the time card screen EXCEPT for the new local deduction code for the 3rd Party Sick Pay that was created in Step 5.

 

•Calculate Payroll Taxes.  During this process, a screen will pop up on this employee so that you can review the tax calculations.  

 

Tax Amount

Subject Wage

FWH

Enter 0 if employee has NOT elected to have federal income tax withheld from the sick pay plan.

 

The subject wage should equal the gross pay amount.  Even though FWH on these wages is not mandatory, the wages are considered taxable income to the recipient and must be reported

on the recipient's federal income tax return and on the employer's 941.  

 

Social Security

The employee portion of FICA social security tax will be automatically calculated by AB and displayed on this screen.  The employer portion will not be calculated until the check is posted.

 

The subject wage should equal the gross pay amount (unless the YTD limit has been reached) so that AB can correctly report wages on the 941 and W-2 reports.

Medicare

The employee portion of FICA medicare tax will be automatically calculated by AB and displayed on this screen.  The employer portion will not be calculated until the check is posted.  

 

The subject wage should equal the gross pay amount so that AB can correctly report wages on the 941 and W-2 reports.

FUTA

The FUTA tax will be automatically calculated by AB.  Leave the calculated amount if your plan has transferred the liability of the employer taxes to your company.  Enter 0 if the plan is paying the tax for you.  

 

The subject wage should equal the gross pay amount or a fraction thereof up to a YTD limit of 7000.

 

 

State Taxes

Depending on your state, make the same type of adjustments for state taxes as described above.

 

For example, in California, third-party sick payments are "wages" for the purpose of reporting Unemployment

Insurance (SUI), Employment Training Tax (ETT), and Personal Income Tax (PIT/SWH).  Even though PIT withholding on these wages is not mandatory, the wages are considered taxable income to the recipient and must be reported

on the recipient's California income tax return and on the employer's DE9C.  Payments for third-party sick pay are not subject to California's State Disability Insurance (SDI).

Depending on your state, the subject wage should equal the gross pay amount unless the YTD limit has been reached or the tax is completely exempt.

 

•Print Paychecks.  Be sure to use the liability date as the check date on your entry.  The printed check should net to zero.  The gross pay should appear in the 3PSick pay field as well as the 3PSick deduction field.

 

•Post Payroll.

 

•Adjust the FICA Tax Accrual.  During the posting process, AccuBuild will accrue the employer portion of the FICA payroll tax calculation, along with any other applicable employer taxes.  The employee portion of the tax, although paid by the 3rd Party, has also been accrued and must be reversed in the general ledger.  Make a general journal entry to debit the FICA tax liability account and credit the '3rd Party Sick Pay' expense account that was established in Step 1.  The balance in the new expense account and the balance in the FICA liability account should equal the total payroll tax burden that you are responsible for depositing.

 

•Deposit Taxes.  Print reports and make the payroll tax deposits as you would normally.

 

•Payroll Tax Reports.  Print the quarterly tax reports as you would normally.  

 

Form 941 - You must include third-party sick pay on Form 941, lines 2, 5a, and 5c. There should be no sick pay entry on line 3 because the third party withheld federal income tax, if any. After completing line 6, subtract on line 8 the employee social security and Medicare taxes withheld and deposited by the third party.

 

Form W-2 - A form W-2 must be prepared even if all the sick pay is nontaxable (refer to IRS publication 15A).  All Forms W-2 must be given to the employees by January 31.

 

 

 

 

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