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Enter non-taxable third-party sick pay

Learn how to enter non-taxable third-party sick pay on a payroll check in QuickBooks Desktop.

Do you need to add sick pay on a payroll check? You can enter non-taxable third-party sick pay on a payroll check in QuickBooks Desktop. This enables you to track third-party sick pay on paychecks and properly report these payments on the correct tax forms.

Enter third-party sick pay

If you have received the third-party sick pay amounts from your provider, you can enter the pay on a payroll check.

  1. Create a new expense account
  2. Create a new Addition payroll item
  3. Create a new Deduction payroll item.
  4. Create paychecks

The following sections provide detailed steps and guide you through the process.

Create a new expense account

The first step in the process is to create a new expense account for the payment. We recommend that you create this expense account as a sub-account of Payroll Expenses to associate it with that related account and make it easier to find.

  1. Select Lists, and select Chart of Accounts.
  2. Select the Account button, and select New.
  3. In the Add New Account window, select Account Type, select Expense, and then select Continue.
  4. In the Add New Account window, enter the name of the new expense account (for example, Non-taxable third-party sick pay) in the Account Name field.
  5. (Optional) Select the Subaccount of checkbox, and from the drop-down list, select Payroll Expenses.
  6. Select Save and Close.

Create a new Addition payroll item

The next step is to create a new Addition payroll item. The Addition item allows the sick pay to be added to the net so that taxes are not calculated on the amount, and the paid amount appears on the W-2.

  1. Select Lists, and select Payroll Item List.
  2. Select Payroll Item, and select New.
  3. In the Select Setup Method window, select Custom Setup, and select Next.
  4. Select Addition, and select Next.
  5. In the Name Used In Paychecks And Payroll Reports window, in the Enter Name For Addition field, enter the name of the new Addition payroll item (for example, Add non-tax third-party sick), and select Next.
  6. In the Expense account window, select the name of the expense account you just created from the Enter The Account For Tracking This Expense list, and select Next.
  7. In the Tax tracking Type window, select Non-taxable Sick Pay from the drop-down list, and then select Next.The amount paid will appear in box 12 of Form W-2 with the code J.
  8. In the Taxes window, verify that no taxes are selected, and select Next.
  9. In the Calculate Based On Quantity window, select Neither, and select Next.
  10. In the Gross vs. Net window, select Net Pay, and select Next.
  11. In the Default Rate And Limit window, clear both fields and verify that they are blank, then select Finish.

Create a new Deduction payroll item

The Deduction item backs out the additional sick pay so that the net pay is not increased on the paycheck. Create a new Deduction payroll item:

  1. Select Lists, and select Payroll Item List.
  2. Select the Payroll Item button, and select New.
  3. In the Select Setup Method window, select Custom Setup, and select Next.
  4. Select Deduction, and select Next.
  5. In the Name Used In Paychecks And Payroll Reports window, enter the name of the new payroll deduction item (for example, Deduct non-tax third-party sick), and select Next.
  6. In the Agency For Employee-Paid Liability window, select the new expense account you just created from the Liability account (employee-paid) drop-down list, and select Next.
  7. In the Tax Tracking Type window, select None from the drop-down list, and select Next.
  8. In the Taxes window, verify that no taxes are selected, and select Next.
  9. In the Calculate Based On Quantity window, select Neither, and select Next.
  10. In the Gross vs. net window, select Net Pay, and select Next.
  11. In the Default Rate And Limit window, clear both fields and verify that they are both blank, and select Finish.

Create the paycheck

The last step in the process to enter third-party sick pay on a payroll check is to create the paycheck.

  1. Select Employees, select Pay Employees, and then select Unscheduled Payroll.
  2. In the Enter Payroll Information window, select the employee to be paid, and select the name in the Employee column.
  3. In the Review and Create Paychecks window, review whether there are any earnings, and if so, set them to zero.
  4. Select the Open Paycheck Detail button.
  5. In the Preview Paycheck window, select the new Addition item (for example, Add non-tax third-party sick) you just created from the drop-down list in the Other Payroll Items field, and, in the Rate column, enter the amount the employee was paid.
  6. On the next line, select the new Deduction item you just created (for example, Deduct non-tax third-party sick) from the drop-down list in the Other Payroll Items field, and, in the Rate column, enter the amount the employee was paid.A minus sign automatically appears in front of this amount.
  7. Select Save and Close.
  8. In the Review and Create Paychecks window, select Create Paychecks.
  9. Print the paycheck and review the W-2 form.

Form W-2

When creating your employee's W-2, Box 13 is checked only if you are Third Party Payer, or you are reporting amounts paid by a third party for sick pay.

If that applies to you, when you start to generate the W-2s and are prompted to indicate if one of the "special situations" (Statutory Employee, Retirement Plan, or Third-Party Sick Pay) applies, be sure to select the Third-party sick pay option. In the review window, you can select that option for specific employees.

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