Both vacation pay and sick pay are included in your income. See below.
Special rules apply to the reporting of sick pay payments to employees. How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. Sick pay is usually subject to social security, Medicare, and FUTA taxes. You do report sick pay on your income, here is how:
You may either combine the sick pay with other wages and prepare a single Form W-2 for each employee, or you may prepare separate Forms W-2 for each employee, one reporting sick pay and the other reporting regular wages. A Form W-2 must be prepared even if all of the sick pay is nontaxable (see Box 12 next). All Forms W-2 must be given to the employees by January 31.
The Form W-2 filed for the sick pay must include the employer's name, address, and EIN; the employee's name, address, and SSN; and the following information.
- Box 1 – The amount of sick pay the employee must include in income.
- Box 2 – The amount of any federal income tax withheld from the sick pay.
- Box 3 – The amount of sick pay subject to employee social security tax.
- Box 4 – The amount of employee social security tax withheld from the sick pay.
- Box 5 – The amount of sick pay subject to employee Medicare tax.
- Box 6 – The amount of employee Medicare tax (including Additional Medicare Tax, if applicable) withheld from the sick pay.
- Box 12 (Code J) – Show any sick pay that was paid by a third-party and wasn't includible in income (and not shown in boxes 1, 3, and 5) because the employee contributed to the sick pay plan. Don't include nontaxable disability payments made directly to a state.
- Box 13 – Check the "Third-party sick pay" box only if the amounts were paid by a third party.
Under IRS rules, lump sum payments are considered supplemental wages and are subject to Social Security and Medicare taxes even if your maximum contribution limit is greater than your vacation payout. Any federal income tax withheld will be at the IRS supplemental
wage tax rate of 25%.