Sick Pay

In general, sick pay made to employees requires all of the Social Security, Medicare, and income tax withholdings that are calculated for normal wages; however, there are a few exceptions. For example, if an employee dies and sick pay is made to his or her estate in the following calendar year, this amount is not subject to any of the usual payroll withholdings or taxes. The same rules apply if sick payments are made to an employee who has been absent from work for at least six months.

If employees contribute to a sick pay plan with after-tax dollars, then any payments made to them from that plan will not require any withholdings or payroll taxes, on the grounds that the employee already paid those taxes on the initial cash used to fund the plan. Alternatively, if the sick pay plan is funded with pretax dollars (as can occur through a cafeteria plan), then any pay from the sick pay plan will require income tax withholdings and all other normal payroll taxes, on the grounds that the employee would otherwise never pay taxes on the wages paid.

If employees are paid sick pay through a third party, such as an independent insurance company, the third party has no obligation to withhold income taxes, though it can do so if an employee submits to it a Form W-4S that states how much is to be withheld. The minimum amount that can be withheld in this manner is $20 per week.