Generally, sick pay is any amount paid to an employee who calls in sick. It does not include short and long-term disability payments (paid by the employer or a third party, such as an insurance company) or workers’ compensation payments.
Qualified sick pay is governed by a written plan and meets all of the following requirements:
makes provision for all employees or a class or classes of employees, and/or their dependents
provides for payment to or on behalf of an employee or any of the employee's dependents, and assures employee awareness of the terms and conditions of the plan
contains definite payment eligibility standards that may include length of service, salary, classification, or occupation, but may not be based solely on need, efficiency, or loyalty
contains a formula for determining the minimum benefit amount for each eligible employee
specifies the minimum period of payments (for example, payments will be made for the duration of the employee's illness, or for as long as the employment relationship continues)
The specific terms of a qualified sick pay plan are at the employer's discretion, but the employer must adhere to the terms once the plan is established. The benefits provided by the plan cannot be applied on a discretionary or occasional basis; however, an employer may have a qualified sick pay plan for one class or group of employees and a non-qualified sick pay plan for another class or group of employees. For example, an employer’s policy may give five paid sick days a year to full-time employees but no paid sick time to part-time employees.
Non-qualified sick pay is not governed by a set plan. The employer decides on an ad hoc basis whether or not to pay for a sick day when an employee calls in sick.
All employer-paid sick pay is considered a continuation of the employee's salary and is included in compensation subject to federal income tax withholding, state withholding, local withholding, FICA, and FUTA.
The distinction between a qualified sick pay plan and a non-qualified sick pay plan is only significant when looking at state unemployment taxability. Some states exclude sick pay paid under a qualified plan from their SUI wage base. In the following states, only non-qualified sick pay is subject to SUI:
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Alabama |
Iowa |
South Carolina |
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Alaska |
Michigan |
Texas |
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Delaware |
Oklahoma |
Washington |
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Hawaii |
Rhode Island |
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In all other states, qualified and non-qualified sick pay is subject to SUI.
If you have specific questions on SUI taxability, please consult your state unemployment agency or ask your accountant or tax professional for advice.