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How to Report Third-Party Sick Pay to the IRS

Author: Alice Gilman

An employee who receives sick pay - long-term or short-term disability pay - from an employer or a third party, such as an employer's agent or an insurance company, is required to pay Social Security and Medicare (FICA) taxes on the amounts received. Federal income tax withholding is mandatory or voluntary, depending on the payer. Although sick pay is taxable to the employee, and the employer must pay its matching share of FICA taxes, under special rules the employer and the third party may transfer liability between themselves for withholding, depositing and reporting the taxes attributable to the sick pay.

Third-party sick pay is reported on Form 8922, Third-Party Sick Pay Recap, if the liability for the employer's portion of FICA taxes has been transferred between the employer and the employer's third party. Whether the third party or the employer reports the sick pay on Form 8922 depends on the entity that is filing Forms W-2 reporting the sick pay paid to individual employees.