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Third Party sick pay is not taxable to PA how do I get it to Not show on the PA 40

mmfarmhighlands
Level 1
 
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6 Comments 6
Camp1040
Level 10

I don't know if it is taxable or not to PA, generally PA does not exempt much.

Be sure that you checked the box on the W-2 worksheet indicating that the amount is from a 3rd party payer.

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Sick pay and sick leave are taxable compensation when representing regular wages. ... Payments, not representing regular wages, including payments made by third party insurers for sickness or disability, are not taxable income for Pennsylvania purposes.

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Accountant-Man
Level 12

Is box 16 on the W2 completed for PA? The ones I've seen for NJ do NOT have box 16 completed for NJ.

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itonewbie
Level 15

Third party sick pay not taxable to PA is not an adjustment on the return.  It must be reflected on Line 1a of PA-40 and it is the employer's and/or the agent's responsibility to ensure the correct reporting of PA wages in Box 16 if all the conditions are met.

Third party sick pay, for federal tax reporting purposes, could include payments made by an agent on behalf of the employer on a cost-plus basis but that does not count for purposes of 61 Pa. Code § 101.6(c).

If the employer did not report the correct amount in Box 16, your client should request a W-2C from the employer.  Otherwise, PA DOR generally requires a written statement from the employer and, without which, the taxpayer must attach his/her own explanation of the difference between Box 16 and Line 1a to the return.  In this case, you will simply enter in PTO what Box 16 should be, taking into account the nontaxable third party sick pay.

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FEDRET
Level 1

Hello

I am hoping you might clarify the definition of "Payment, not representing regular wages, including payments made by third party insurers for sickness or disability, are not taxable income for PA Purposes."  This the wording I received from the Pa Department of Revenue which is also what you have cited in your earlier response.

Background: My brother became disabled in February 26, 2020, and could not work. He did not have any siick or other paid leave available, so he therefore went immediately  on short term disability and then to long term disability.  The disability pay he is receiving is provided through a third part private insurance company which is a benefit provided by his old employer to their employees. The employer has paid for this policy.

My brother remains permanently disabled and as of February 26,2021 (one year), his old employer has terminated him since he cannot return to work; however the disability benefits from the third party insurer will continue for some time.

When I received his 2020 W2 from the insurer for his benefits they paid, they are showing the disability benefits paid in Block 1 as "Wages, tips, other compensation", and in Block 13, the "third party sick pay" is noted; there are no other explanatory codes in Block 12 (a) thru (d) as I was expecting. 

I tried to seek an answer from the disability pay insurer and they informed me that the benefits/tax documents are administered thru still another third party and not the insurer.  They will not let me contact the payroll company nor do they appear willing to challenge this classification on the W2.

I fully understand that since my brother has not paid premiums for this disability policy, then the benefits he receives is fully taxable under Federal tax rules; the issue for us is the PA tax treatment.

It seems that everything hangs on the phrase "Payment, not representing regular wages".  I cannot find any definition of this and/or its plain meaning. If I could find the actual meaning of this I might be able to successfully challenge the payroll company to reconsider their interpretation.  Furhter, since my brother has been formally terminated this past February, will this affect their treatment of his disability benefits as "Wages and Income for the balance of  2021? 

I am sorry for the long note, but thought the more detail I can provide the better.

Thank you for your kind consideration.

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itonewbie
Level 15

@FEDRET Sorry to hear about your brother but this Community is open only to tax professionals.  For consumer questions, please visit the TurboTax Help site for support instead.



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Still an AllStar
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warrensidosky
Level 1

Any advice on how to handle disability payment W2 for NJ? I’ve contacted Intuit Support twice, been on the phone for hours, the last person I also sent a copy of the return to several weeks ago, and have yet to get a response.

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