Sick pay is money paid to your employees if they are temporarily absent from work because of an injury, illness, or disability. Often, that absence is due to either short-term or long-term disability.
Big difference here! Workers' compensation specifically refers to a work-related injury or illness, which means the injury happened on the job or the illness was somehow caused by working conditions. Sick pay, on the other hand, is a payment to an employee as part of a plan when the employee misses work for a medical cause unrelated to work.
As an employer, you have a choice for how to execute sick pay for employees – either you can pay them directly, or you can use a third party, like an insurance company.
Third party sick pay is basically what it sounds like – an external party pays your employees’ sick pay.
Don't get these payments confused with sick pay – they're separate payments and they're not taxed the same way!
When paid by a third party, sick pay is subject to social security, Medicare, and FUTA taxes. Usually the third party will withhold and deposit the employee social security and Medicare, and you, the employer, will be responsible for the employer social security, Medicare, and FUTA.
However, if you pay the sick pay directly to your employee without the middle man, you must handle employee FICA as well, and also withhold federal income tax.
Whether you or your third party pays, payments that are not subject to social security, Medicare, or FUTA include:
Assuming the third party has given you the job of taking care of the employer FICA and FUTA – which is what usually happens-- here’s what you need to do:
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