Third Party Sick Pay is defined as sick or temporary disability payments made to employees from a third party such as an insurance company, employee union plan, temporary disability plan, self-insured plan, or employees' trust fund.
These payments are generally taxable for Federal withholding, Social Security, and Medicare taxes. Payments and withheld taxes are reported on the quarterly 941 Form and the employee's W-2 form. Benefits are also subject to FUTA Federal Unemployment Tax Act taxes to the taxable limit. In addition, Third Party Sick Pay is generally taxable for SIT State Income Tax and SUI State Unemployment Insurance . Contact the applicable state for detailed information.
The division of Third Party Sick Pay depositing and reporting requirements depends on the specific agreement between the employer and third party. The three most common types of agreements are:
• Payments by self-insured employer
• Payments by an agent
• Payments by insurance company.
Deposit and reporting responsibilities for these "types" are outlined in the Employer's Third Party Sick Pay Agreements Chart located in the Reference chapter. Be sure to review your contract with your third party provider before reporting Third Party Sick Pay information for processing.
The most common arrangement involves an employer contracting with an insurance company to issue benefit payments. The insurance company must withhold the Social Security and Medicare (i.e., FICA Federal Insurance Contributions Act ) taxes to taxable wage limits. If requested by the employee, federal and/or state income tax must be withheld as well. The insurance company generally deposits only the FICA taxes. If income tax is withheld, the employer is responsible for depositing these taxes in addition to the employer portion of FICA taxes.
Using this general employer/insurance company arrangement as an example, the Third Party Sick Pay benefit payment and deposit reporting responsibilities are shared between the two parties. The insurance company is responsible for reporting payments on their Form 941 with Social Security wages and Medicare wages to the taxable limit. They also include a credit on their Form 941 for the portion of FICA taxes deposited by the employer.
Employers also reports the benefit payments on their company's Form 941. These payments are to be included as wages subject to withholding, Social Security, and Medicare taxes. Any federal income tax withheld is also to be reported. Employers also includes a credit on their Form 941 for the employee portion of FICA taxes deposited by the insurance company.
Third Party Sick Pay payments must be included on the employee's W-2. Responsibility for creating the W-2 for these payments is determined by the contract between employer and insurance company and can vary from one contract to another.
Depositing requirements
Sick pay itself has its own specific depositing and reporting requirements. Sick pay payments are generally taxable for the taxes listed below.
• Federal withholding taxes, if requested by recipient
• Social Security and Medicare taxes, employee and employer portions
• FUTA taxes to the taxable limit
• State withholding taxes, if requested by recipient
• State unemployment insurance (in some states).
Social Security and Medicare taxes (i.e., FICA) apply to sick pay payments only through the first six full calendar months following the month in which the employee's absence began. Payments after the six-month period are exempt from FICA, but they remain subject to income taxes and unemployment taxes.
Reporting requirements
Any withheld taxes and payments must be reported on the appropriate forms:
• Quarterly Form 941
• Annual Form 940
• State returns (as required)
• Employee's Form W-2
Providing Third Party Sick Pay information to the Tax Service
A third party provider will generate a payment report each time benefits are paid. This report is often forwarded to the company's Human Resource department. Because Third Party Sick Pay payments are made by a third party and not by your company, this information may not be included with your other payroll tax information transmitted to the Tax Service.
If your payroll process involves making all the necessary Third Party Sick Pay adjustments through your payroll program, and the adjustments update both your pay period and quarterly totals, no extra steps are needed.
If adjustments are not being made through your payroll program or your pay period, and quarterly totals are not affected, Third Party Sick Pay data must be sent to the Tax Service using an alternative method in order for the data to be included in deposits and returns.
TMS Tax Management System- Manually enter or import Third Party Sick Pay data and transmit it via our PC-based product Tax Management System (TMS). TMS allows you to directly input or import the information to the Tax Service system, avoiding manual intervention or misinterpretation. It also allows you to create Third Party Sick Pay data for wage listings to state unemployment agencies, if applicable.If you elect to send the data using TMS, contact your Tax Service Representative for a copy of the software and instructions on getting started.
Manual - Manually enter the data on Third Party Sick Pay forms and fax the forms to the Tax Service for processing. Samples of the Third Party Sick Pay forms are found in the Reports and Forms chapter.
Third Party Sick Pay reporting:
Should be done on a periodic, or per payment basis, and
Must be done at the end of every quarter.
If you provide Third Party Sick Pay liabilities at quarter-end only, we will make every effort to make timely deposits. Please be aware, however, that penalty and interest may be assessed for late depositing. You can ensure timely deposits by reporting Third Party Sick Pay by the deadline published in your QE Planner.
Pay period reporting
Taxes withheld from payments should be reported as they occur, that is, on a per pay period basis, but Third Party Sick Pay totals must be reported at the end of every quarter.
Complete the following steps to report Third Party Sick Pay data as payments are made throughout the quarter:
1. Review the Third Party Sick Pay Periodic Worksheet for assistance in defining reporting requirements for your company.
Prior to reviewing the Periodic Worksheet, familiarize yourself with your company's policy or the details of your contract with the third party provider. The Periodic Worksheet will help you determine who administers your Third Party Sick Pay.
2. Review your state's SIT and SUI requirements.
This ensures that your company is in compliance and your employee's records are accurate.
3. Transmit tax data via TMS to the Tax Service or complete the Third Party Sick Pay Tax Summary Report ( TSR Tax Summary Report, or Tax Service Representative ) each time you have Third Party Sick Pay data to report during the course of the quarter.
Refer to the Reports and Forms chapter for a copy of the TSR and instructions on how to complete the form. Fax the signed and completed form to your Tax Service Representative.
4. Ensure that funds are available.
Upon receipt of your Third Party Sick Pay tax data (sent via TMS or TSR), the Tax Service debits your account for undeposited FIT Federal Income Tax , SIT, and the employer portion of the Social Security and Medicare taxes. Then, the Tax Service makes the deposits.
5. Determine the insurance carrier's role regarding W-2s.
Examine your contract with the third party provider (i.e., the insurance company) to determine who is responsible for producing W-2s and who is responsible for filing W-2s. A misunderstanding of this important area could result in a failure to produce and/or file W-2s.
6. Update your employees' records.
If your company is responsible for reporting these payments on the W-2s, employee records should be updated to include benefit payments to all appropriate areas.
Quarterly reporting
Complete the following steps to report Third Party Sick Pay data at the close of each quarter:
1. Review the Third Party Sick Pay Quarterly Worksheet for assistance in defining reporting requirements for your company.
Prior to completing the Quarterly Worksheet, familiarize yourself with your company's policy or the details of your contract with the Third party provider. The Quarterly Worksheet will help you to determine the areas of responsibility.
2. Review your state's SIT and SUI requirements.
This ensures that your company is in compliance and that your employees' records are accurate.
3. Transmit your quarter-to-date and year-to-date totals to the Tax Service via TMS or by faxing the "Third Party Sick Pay QTD & YTD Totals" form to the Tax Service by the published deadline.
Refer to the Reports and Forms chapter for a copy of the Third Party Sick Pay QTD & YTD Totals form and instructions on how to complete the forms.
Fax the signed and completed form to your Tax Service Representative by the published deadline.
Data provided on the "Third Party Sick Pay QTD & YTD Totals" form is used to update federal Form 941, federal Form 940, and the appropriate state income tax return(s). The Tax Service does not adjust your state unemployment wage detail and return. Contact the Ceridian Customer Service Center (CSC) if you require instructions on how to make SUI wage adjustments within your payroll program.
4. Ensure that funds are available.
Upon receipt of your Third Party Sick Pay data (sent via TMS or the "Third Party Sick Pay QTD & YTD Totals" form), the Tax Service debits your account for undeposited FIT, SIT, and the employer portion of the Social Security and Medicare taxes. Then, the Tax Service makes the deposits and files the data on the appropriate federal and state income tax returns.
5. Determine the insurance carrier's role regarding W-2s.
Examine your contract with the third party provider (i.e., the insurance company) to determine who is responsible for producing W-2s and who is responsible for filing W-2s. A misunderstanding of this important area could result in a failure to produce and/or file W-2s.
If your company is responsible for reporting these payments on the W-2s, employee records should be updated to include benefit payments to all appropriate areas.
If you require Ceridian to include your Third Party Sick Pay payments on W-2s, one of the following options is available:
Input the wage and tax information through a specialized Third Party Sick Pay screen available with most Signature software. Or
Complete the Third Party Sick Pay W-2 Transmittal form provided by your payroll district office and forward it to the payroll district office for manual input by their staff.