Whether obtained online or through the mail, the arrival of Form W-2 is usually eagerly anticipated by most employees. Although some of the entries on Form W-2 are self-evident, some entries may consist of only a number alongside a code. Employees who receive sick pay through their job during the year will likely have to decipher the entries on Form W-2 to determine whether the sick pay is taxable.
Sick pay, also known as sick leave, is a short-term employee benefit intended to replace wages in the event of illness or injury. Unlike workers' compensation, which is for on-the-job injuries, sick leave is for injuries or illness incurred away from work. Even though sick pay coverage is usually limited to a short duration, many companies contract with an insurance company to process the payments.
Taxable versus nontaxable
The tax status of sick pay depends on whether you contributed to the cost of the related insurance plan. If you paid for the full cost of coverage, sick pay is not taxable. If your employer paid for some or all of the coverage, sick pay is partially or fully taxable. You don't have to perform any calculations, because the tax status of sick pay is summarized on Form W-2.
If you received sick pay during the year, look for any entries in box 12 of your Form W-2. Nontaxable sick pay received through a third party is reported in box 12 of Form W-2, along with the code J. The amount reported as nontaxable sick pay is for informational purposes and is not included in taxable wages. Any taxable sick pay is included in box 1 of Form W-2 as part of taxable compensation.
Separate W-2 for sick pay
Employees who receive sick pay through a third-party provider may receive a second Form W-2. The IRS allows the issuance of a separate Form W-2 for the reporting of sick pay. Even if your pay for sick leave is fully nontaxable, it still must be included on a Form W-2. A separate Form W-2 for sick pay is better because it doesn't combine taxable sick pay with wages.
Box 1 of Form W-2 is labeled as wages, tips, and other compensation. If you receive a separate Form W-2 for sick pay, any taxable sick pay should be shown in box 1. For informational purposes, the amount of nontaxable sick pay is shown in box 12 of the Form W-2, along with code J.
Accountants examine every code entered on Form W-2 before preparing a tax return. Contact a certified public accountant such as those with Vlasac John M & Co with questions about your tax return.Share