How to File Sick Pay Taxes When Tax Season Rolls Around

Here's how to file sick pay taxes if you received sick leave pay in the past tax year. It's important that you include sick leave pay in your taxes.

Kathryn Underwood - Author

Feb. 6 2023, Updated 2:19 p.m. ET

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Illness that prompts absence from work may lead to receiving sick leave pay.

Sick leave pay is a benefit that employers may offer after an employee has been with the company a certain amount of time. If you've used sick leave and received compensation over the past tax year, it's important to know how that will impact your tax return. Here's how to file sick leave pay when tax season comes around.

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Receiving compensation from your employer while you're ill and unable to perform your job is helpful for getting you through a tough time. Especially if you experience a long illness, sick leave pay is a lifeline. However, that doesn't mean it's exempt from taxation by Uncle Sam.

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Sick leave is an important benefit for employees, but could impact your tax returns.

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Do I have to report sick pay on my taxes?

As Intuit explains, sick leave pay may be taxable, but not in all situations. In general, the question is answered based on whether it was you who paid for the sick leave policy, or your employer who paid it. If your employer paid for a third-party sick leave policy and you used leave during the year, your sick pay is taxable income.

As The Motley Fool reported, most people receive payments for sick leave directly from their employers. Usually the income is then included in your federal taxable income. Employers are also required to treat sick leave pay the same as other compensation employees receive, so they will withhold Social Security and Medicare payroll taxes.

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What form does the IRS use for sick pay?

Sick pay may be considered either regular wages or supplemental wages by the IRS, if paid by the employer. If it's considered regular wages, then Form W-4 determines the amount of withholding for sick pay.

The IRS also uses Form 8922 to reconcile employment tax returns with Forms W-2 after third-party sick leave is paid.

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Sick leave might be used not only for the employee's illness, but for when an employee must stay home with a sick child or one whose daycare is closed due to illness.

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Intuit TurboTax states that if you paid for your sick leave policy yourself and received a W-2, you don't necessarily need to include this in your tax return. Here are the indications your sick pay isn't taxable (must be all to qualify):

  • Box 1 is blank or wages are $0
  • Box 12 has Code J
  • Box 13 has "nontaxable sick pay" checked
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Here's how to report third-party sick pay on your taxes.

You might also receive sick leave pay through a third party. As The Motley Fool notes, you may have been responsible for paying premiums on such coverage. It's important to know whether you paid this expense using pre-tax or post-tax dollars.

The simplest circumstance is if you've paid the entire premium for third-party sick leave coverage with after-tax dollars. Those benefits of insurance don't count as taxable income and there won't be payroll tax consequences either.

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It gets more complicated if you paid for the premiums on third-party sick leave coverage yourself, but you paid them using pre-tax dollars. This might happen if your employer allowed you to have pre-tax money withheld from your paycheck to pay the insurance provider. Then, any benefits you received from a third party is subject to taxation.

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You may need to check with your state about sick leave taxes as well.

It's a good idea to find out whether your state treats sick leave pay the same way as the federal government. Not all states may follow the same guidelines.

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Consider other tax issues like the Earned Income Tax Credit.

Other factors may be impacted by your sick leave pay, such as the Earned Income Tax Credit (EITC). Sick leave pay will likely count as earned income, which could impact your eligibility for the EITC.

If your illness lasts over six months and your employer pays your sick leave premiums to a third party, payroll taxes won't be assessed. Payroll taxes are imposed for illnesses under six months.


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