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!