Third Party Sick Pay on W-2/W-3

Hi, @tmarie2. Thanks for reaching out to us. I see you're dealing with reviewing the Third-Party Sick Pay payroll item and are concerned about it being added to your employee's wages twice when generating W-2s. It's important to get this right for accurate payroll reporting, so let's go through the steps together to resolve this issue.

We can choose Non-taxable Sick Pay (non-taxable) or Compensation (taxable) when reviewing your third-party sick pay payroll item. To determine the correct type, refer to the Explanation of Benefits (EOB) from the insurance provider or contact them to obtain it. Check out this article for more details: Track and report third-party sick pay in QuickBooks Desktop Payroll Enhanced.

To begin, let's review the payroll item:

1. Go to the Lists menu, followed by Payroll Item List.
2. Double-click on the third-party sick pay payroll item.
3. Hit Next, and please take note of the payroll expense account.
4. Click Next once more to reach the Tax Tracking type section.
5. From the drop-down list, choose:
   a. Compensation - the amount will appear in Box 1 of the W-2 form together with the regular wages.
   b. Non-taxable Sick Pay - reported in Box 12, code J of the W-2 form.
   

    

It sounds like you've initially set up the third-party sick pay with a Compensation tax tracking type. In this case, it may be the insurance company has already provided the third-party sick pay to your employee, and you need to report it without duplicating the wages in the W-2 form. We can do this by creating a deduction payroll item to offset the third-party sick pay amount already received.

1. Go to Lists, then Payroll Item List.
2. Choose the Payroll Item dropdown, followed by New.
3. Select Custom Setup, then Next.
4. Pick Deduction, then Next.
5. Enter a name for the new deduction item such as “Deduct third-party sick pay”. Hit Next.
6. In the Liability account dropdown, pick the same expense account from your third-party sick pay payroll item.
7. Choose None from the Tax Tracking Type dropdown. Select Next three times.
8. In the Gross vs. net window, select net pay, then Next.
9. Hit Finish.
   

    

To apply the deduction item, review the period during which the third-party sick pay was provided and identify the paycheck/s that need adjustment. Then, you can follow these steps to edit each paycheck:

1. Go to the Employees menu. Then, Edit/Void Paychecks.
2. Choose the appropriate date and sort by employee, paycheck date, or check number.
3. Double-click on a paycheck with the third-party sick pay.
4. Select Paycheck Detail.
5. On the bottom right portion, pick the Unlock Net Pay radio button.
6. Under the Other Payroll items section, add the offsetting deduction item.
7. Since the item is a deduction, enter the same amount as a negative figure.
8. Review other details, then, hit OK.
   

    

Given the complexities of tax laws and payroll reporting, it's advisable to browse through the other applicable scenarios from the QuickBooks article mentioned earlier and collaborate with your accountant to ensure the setup and reporting are accurate.

Once done, preview your W-2 Forms and cross-check it with the third-party statement. You can run a Payroll Summary or Payroll Details report to ensure the net effect of the third-party sick pay on the total wages is accurate.

I hope the information provided helps clarify the setup for the third-party sick pay and ensures accurate reporting on your W-2 forms. If you have any additional questions or require further assistance, feel free to click on the Reply button. We're committed to offering ongoing support. Take care!

What about when you have to enter the FICA and Medical that the third party deducted and paid, but you have to show it on the employee  W2

What about when you have to post the FICA and Medical from the third party sick pay. They deducted and paid it but I have to show it on the W2?

Thanks for following along with the thread and sharing your concerns, @karguy51.

You'll want to follow the same steps my colleague, AlverMarkT, outlined for setting up Third-Party Sick Pay using Compensation so the wages report correctly on the employee's W2. The offset deduction prevents the wages from being counted twice. 

In addition to that, when the third-party insurer has already withheld and paid Social Security and Medicare, those tax amounts must still be manually entered in QuickBooks so they appear correctly on the W2 (Boxes 4 and 6) and tie to the 941, without affecting net pay. 

To enter the FICA and Medicare paid by the third-party: 

1. Go to Lists, then Payroll Item List. 
2. Click on Payroll Item then New. 
3. Choose Custom Setup, then Next. 
4. Select Company Contribution, then Next. 
5. Create payroll items for:
   • Employer Social Security (Third-Party). 
   • Employer Medicare (Third-Party). 
6. For each item, set the Tax Tracking Type to the appropriate tax (Social Security or Medicare). 
7. Use the same expense account used for the third-party sick pay item. 
8. Click on Finish. 

To apply the taxes to the paycheck:

1. Go to Employees>Edit/Void Paychecks. 
2. Locate and open the affected paycheck. 
3. Select Paycheck Detail, then choose Unlock Net Pay. 
4. Add the third-party Social Security and Medicare payroll items. 
5. Enter the amounts exactly as shown on the third-party sick pay statement. 
6. Confirm the net pay does not change, then Save. 

Once complete, preview the employee's W2 and compare it directly to the third-party statement to ensure:

• Wages are correct
• Boxes 4 and 6 reflect the FICA and Medicare already paid
• No duplicate wages are reported

For more information about this process, check out: 

• Track and report third-party sick pay in QuickBooks Desktop Payroll Enhanced
• Report third-party sick pay

Since third-party sick pay reporting can vary based on the insurance provider's filings and IRS requirements, I also recommend consulting this setup with your accountant or tax professional to ensure it aligns with your specific situation. If you don't have an accountant, don't sweat it. You can find one here in our Resource Center. 

Don't hesitate to let me know if you have any additional questions or concerns. I'm happy to assist anytime. Take care! 
 

Thanks for returning to this thread, @karguy51. Let's ensure your employees' third-party sick pay appears on their W2 form in QuickBooks.

When entering taxable third-party sick pay using employee compensation, you'll need to create a wash transaction before generating paychecks to avoid taxes, and the net check appears as negative.

Here's how:

1. Go to Lists, then Chart of Accounts.
2. Select the Account dropdown, then New.
3. Choose Other Current Asset from the Other Account Types menu.
4. Click Continue.
5. Enter the name of the new account in the Account Name field.
6. Hit Save & Close.

Next, make an employee advance payroll item:

1. Go back to Lists, then Payroll Item List.
2. Click the Payroll Item dropdown, then New.
3. Select Custom Setup, then hit Next three times.
4. In the Expense Account window, select the Other Current Asset account you just created, then Next.
5. Set the tax tracking type to None and select Next three times. 
6. Set net pay in the Gross vs. net window, then Finish.

Once done, you can then add a taxable third-party sick pay to a regular paycheck or create a taxable third-party sick pay paycheck-only. You can refer to this article for a detailed process: Track and Report Third-Party sick pay in QuickBooks Desktop Payroll Enhanced.

Please leave a comment below if you need further assistance.

This is what I did, but now I have an account on my P & L with the total of the taxes paid by the third party sick pay co that was used to wash the negative net pay check??

When I created the other current asset account and posted the total of the tax deductions in it to make the paycheck 0. But now I have that amount showing up in the P & L report as payroll expense? but its not my expense, its the total of taxes with held and paid by the third party. Very confused sorry!!

I appreciate you for coming back in this thread, @karguy51. You don't need to say sorry about your confusion, we understand the urgency on resolving this. We're here to help you, especially in the payroll expense part.

This issue occurs when the Expense account of the new item you created still falls under Payroll expense instead of the Other Current Asset account. 

With that in mind, I recommend reviewing the Other Current Asset item you created and checking the Expense account section to see if it's assigned to the correct category.

After that, you can proceed to the steps for reporting third-party sick pay on your employee's paycheck and payroll tax forms, outlined in this article: Track and report third-party sick pay in QuickBooks Desktop Payroll Enhanced.

Feel free to return here if you have additional questions. We're here to assist you promptly.