941 issue with Third Party Sick pay

[BulldogTom]

This follows up my post earlier this week about doing things twice. It gets even worse when you don't know what you are doing.

Situation is this. Company offers employees a pre-tax insurance plan for sickness or disability. One employee was paid from the plan during 2013. The insurance company sent a notice that the employee benefits were paid and they were taxable as wages, and as such needed to be added to the employee's W2. The letter also stated that the employee's FICA was withheld and remitted by the insurance company under the insurance company's EIN and that the employer portion of the FICA needed to be paid by the employer. This is where I get lost a little. I deposited the employer portion of the FICA, no problem there. Then I go back to the 941 and try to make the adjustments and I am getting confused on what to do.

This may be my software (not ATX in this case, the company has a payroll module on its accounting package) that is causing the confusion. If I enter the wages into boxes 5a and 5c, and enter the amount of FICA Tax for the employer portion in line 8, I get too much tax due to the wages being taxed on line 5a and 5c. If I don't put the wages into line 5a and 5c, my Schedule B does not show the correct liability for the quarter.

And my final question is how the IRS is going to reconcile this when the wages and employer taxes are under my company's EIN and the withholding tax from the employee is under the insurance company's EIN?

Sorry if this is basic. I have never had to work with 3rd party sick pay before and I could use some help from you experts who deal with this more frequently. I know how much tax liability I have, and I know how much I need to pay and I paid all the taxes. But I think I may be screwing up the 941 and inviting a letter.

BTW, no need to comment on the state aspects of this. I got those returns corrected without an issue. Same with the 940. The employee was over the limit and it did not change the taxes for FUTA or SUI. Just needed to change the gross wages and the excluded amounts and the return was good. The Nevada MBT resulted in a small amount of tax due, but it was not a big deal to fix that form (I complete that one by hand, and white out makes everything better).

Thanks for your help.

Tom

Hollister, CA

[jklcpa]

C&P from pub 15-A that might help you report correctly and reconcile. See the parts in bold and specifically the underlined text:

Sick Pay Paid by Third Party

The depositing and reporting rules for a third party that is not your agent depend on whether liability has been transferred as discussed under Third party not employer's agent , earlier in this section.

To figure the due dates and amounts of its deposits of employment taxes, a third party should combine:

•The liability for the wages paid to its own employees, and

•The liability for payments it made to all employees of all its clients. This does not include any liability transferred to the employer.

Liability not transferred to the employer. If the third party does not satisfy the requirements for transferring liability for FUTA tax and the employer's part of the social security and Medicare taxes, the third party reports the sick pay on its own Form 940 and Form 941 or Form 944. In this situation, the employer has no tax responsibilities for sick pay.
The third party must deposit social security, Medicare, FUTA, and withheld federal income taxes using its own name and EIN. The third party must give each employee to whom it paid sick pay a Form W-2 by January 31 of the following year. The Form W-2 must include the third party's name, address, and EIN instead of the employer information.

Liability transferred to the employer. Generally, if a third party satisfies the requirements for transferring liability for the employer part of the social security and Medicare taxes and for the FUTA tax, the following rules apply.

Deposits. The third party must make deposits of withheld employee social security and Medicare taxes and withheld federal income tax using its own name and EIN. You must make deposits of the employer part of the social security and Medicare taxes and the FUTA tax using your name and EIN. In applying the deposit rules, your liability for these taxes begins when you receive the third party's notice of sick pay payments.

Form 941 or Form 944. The third party and you must each file Form 941 or Form 944. The discussion that follows only explains how to report sick pay on Form 941. If you file Form 944, use the lines on that form that correspond to the lines on Form 941 that are discussed here.
Form 941, line 8, must contain a special adjusting entry for social security and Medicare taxes. These entries are required because the total tax liability for social security and Medicare taxes (employee and employer parts) is split between you and the third party.

• Employer. You must include third-party sick pay on Form 941, lines 2, 5a, 5c, and 5d (if applicable). There should be no sick pay entry on line 3 because the third party withheld federal income tax, if any. After completing line 6, subtract on line 8 the employee social security and Medicare taxes withheld and deposited by the third party.

• Third party. The third party must include on Form 941 the employee part of the social security and Medicare taxes (and federal income tax, if any) it withheld. The third party does not include on line 2 any sick pay paid as a third party but does include on line 3 any federal income tax withheld. On line 5a, column 1, the third party enters the total amount it paid subject to social security taxes. This amount includes both wages paid to its own employees and sick pay paid as a third party. The third party completes line 5c and 5d (if applicable), column 1, in a similar manner. On line 8, the third party subtracts the employer part of the social security and Medicare taxes that you must pay.

Form 940. You, not the third party, must prepare Form 940 for sick pay.

Third-party sick pay recap Forms W-2 and W-3. For wages paid in 2013, the third party must prepare a “Third-Party Sick Pay Recap” Form W-2 and a “Third-Party Sick Pay Recap” Form W-3. These forms, previously called “Dummy” forms, do not reflect sick pay paid to individual employees, but instead show the combined amount of sick pay paid to all employees of all clients of the third party. The recap forms provide a means of reconciling the wages shown on the third party's Form 941 or Form 944. However, see Optional rule for Form W-2 next for information on designating the third party to be your agent for purposes of preparing Form W-2. Do not file the recap Form W-2 and W-3 electronically.

The third party fills out the third-party sick pay recap Form W-2 as follows.

Box b – Third party's EIN.

Box c – Third party's name and address.

Box e – “Third-Party Sick Pay Recap” in place of the employee's name.

Box 1 – Total sick pay paid to all employees.

Box 2 – Any federal income tax withheld from sick pay.

Box 3 – Sick pay subject to employee social security tax.

Box 4 – Employee social security tax withheld from sick pay.

Box 5 – Sick pay subject to employee Medicare tax.

Box 6 – Employee Medicare tax (including Additional Medicare Tax, if applicable) withheld from sick pay.


The third party attaches the third-party sick pay recap Form W-2 to a separate recap Form W-3, on which only boxes b, e, f, g, 1, 2, 3, 4, 5, 6, and 13 are completed. Enter “Third-Party Sick Pay Recap” in box 13. Only the employer makes an entry in box 14 of Form W-3.

Optional rule for Form W-2. You and the third party may choose to enter into a legally binding agreement designating the third party to be your agent for purposes of preparing Forms W-2 reporting sick pay. The agreement must specify what part, if any, of the payments under the sick pay plan is excludable from the employees' gross incomes because it is attributable to their contributions to the plan. If you enter into an agreement, the third party prepares the actual Forms W-2, not the “Third-Party Sick Pay Recap” Form W-2 as discussed above for each employee who receives sick pay from the third party. If the optional rule is used:

•The third party does not provide you with the sick pay statement described next, and

•You (not the third party) prepare “Third-Party Sick Pay Recap” Forms W-2 and W-3. These recap forms are needed to reconcile the sick pay shown on your Form 941 or Form 944.

Sick pay statement. The third party must furnish you with a sick pay statement by January 15 of the year following the year in which the sick pay was paid. The statement must show the following information about each employee who was paid sick pay.

•The employee's name.

•The employee's SSN (if social security, Medicare, or income tax was withheld).

•The sick pay paid to the employee.

•Any federal income tax withheld.

•Any employee social security tax withheld.

•Any employee Medicare tax withheld.

Example of Figuring and Reporting Sick Pay

Note. The following example is for wages paid in 2013. The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014.

Dave, an employee of Edgewood Corporation, was seriously injured in a car accident on January 1, 2013. Dave's last day of work was December 31, 2012. The accident was not job related.

Key, an insurance company that was not an agent of the employer, paid Dave $2,000 sick pay each month for 10 months, beginning in January 2013. Dave submitted a Form W-4S to Key, requesting $210 be withheld from each payment for federal income tax. Dave received no payments from Edgewood, his employer, from January 2013 through October 2013. Dave returned to work on November 1, 2013.

For the policy year in which the car accident occurred, Dave paid a part of the premiums for his coverage, and Edgewood paid the remaining part. The plan was, therefore, a “contributory plan.” During the 3 policy years before the calendar year of the accident, Edgewood paid 70% of the total of the net premiums for its employees' insurance coverage, and its employees paid 30%.

Social security and Medicare taxes. For social security and Medicare tax purposes, taxable sick pay was $8,400 ($2,000 per month × 70% = $1,400 taxable portion per payment; $1,400 × 6 months = $8,400 total taxable sick pay). Only the six $2,000 checks received by Dave from January through June are included in the calculation. The check received by Dave in July (the seventh check) was received more than 6 months after the month in which Dave last worked.
Of each $2,000 payment Dave received, 30% ($600) is not subject to social security and Medicare taxes because the plan is contributory and Dave's after-tax contribution is considered to be 30% of the premiums during the 3 policy years before the calendar year of the accident.

FUTA tax. Of the $8,400 taxable sick pay (figured the same as for social security and Medicare taxes), only $7,000 is subject to the FUTA tax because the FUTA tax contribution base is $7,000.

Federal income tax withholding. Of each $2,000 payment, $1,400 ($2,000 × 70%) is subject to voluntary federal income tax withholding. In accordance with Dave's Form W-4S, $210 was withheld from each payment ($2,100 for the 10 payments made during 2013).

Liability transferred. For the first 6 months following the last month in which Dave worked, Key was liable for social security, Medicare, and FUTA taxes on any payments that constituted taxable wages. However, Key could have shifted the liability for the employer part of the social security and Medicare taxes (and for the FUTA tax) during the first 6 months by withholding Dave's part of the social security and Medicare taxes, timely depositing the taxes, and notifying Edgewood of the payments.
If Key shifted liability for the employer part of the social security and Medicare taxes to Edgewood and provided Edgewood with a sick pay statement, Key would not prepare a Form W-2 for Dave. However, Key would prepare “Third-Party Sick Pay Recap” Forms W-2 and W-3. Key and Edgewood must each prepare Form 941. Edgewood must also report the sick pay and withholding for Dave on Forms W-2, W-3, and 940.
As an alternative, the parties could have followed the optional rule described under Optional rule for Form W-2 , earlier in this section. Under this rule, Key would prepare Form W-2 even though liability for the employer part of the social security and Medicare taxes had been shifted to Edgewood. Also, Key would not prepare a sick pay statement, and Edgewood, not Key, would prepare the recap Forms W-2 and W-3 reflecting the sick pay shown on Edgewood's Form 941.

Liability not transferred. If Key did not shift liability for the employer part of the social security and Medicare taxes to Edgewood, Key would prepare Forms W-2 and W-3 as well as Forms 941 and 940. In this situation, Edgewood would not report the sick pay.

[grmy2h]

Use line 8 on the 941 to adjust the difference.