CenterPoint Accounting for Agriculture - Third Party Disability/Sick Payments

 

Document #: 3026 Product: CenterPoint Payroll

 

When an employee is paid disability/sick pay from a third party, the employer is responsible for paying the employer portion of FICA and Medicare taxes. The third party payer should be deducting the employee's portion of those two taxes. This tax and earning information must be documented on the 941. How the information is documented on the 941 depends on who will be providing a W-2 to the employee for the disability pay.

Option A: W-2 Provided by the Employer

Option B: W-2 Provided by the Third Party Payer is filing a W-2

Option A: W-2 Provided by the Employer

Step A:  Create an Earning for Third Party Disability Payments:

  1. Select Setup > Payroll Details > Earnings.

  1. Click New. In the Abbreviation box, enter up to 10 characters of information that you can easily identify the earnings by, for example, thrdsick.
  2. In the Name box, enter up to 35 characters of required information that describes the earning.
  3. In the Type box, select Third Party Sick Pay.
  4. In the Method box, select Fixed Rate.
  5. In the Expense Account box, select the expense account for this earning.
Note: This particular earning will not be an expense to the company, but still requires an account to be assigned.
  1. Leave the Base Rate at $0.00.
  2. Click on the Taxes tab.

  • Any company-paid taxes to be calculated should be selected in the Taxes Calculated on Earning column. Set Federal W/H, State W/H, Social Security, and Medicare to Subject to But Don't Withhold. Check with your accountant to verify if this earning is subject to FUTA, SUTA, worker’s compensation or local taxes. If the earning is exempt from any of these, leave the tax checked in the Exclude from Earning column.
  • Also check with your accountant to verify if you should calculate taxes for the employer when they have otherwise been excluded from the earning (by selecting the Exclude from Earning column). Select the Calculate Employer Share column to force the calculation of taxes for the employer, which is normally done for Social Security and Medicare.
  1. Click on the Deductions & Benefits tab.
  • Verify all items are in the Exclude Deductions / Benefits box.
  1. Click Save. The earning will automatically be added to all employers in the database.

Step B: Assign the 3rd Party Disability Payments earning to the appropriate employees:

  1. Select Setup > Employees.
  2. Select the Payroll tab.
  3. Select the Third Party Sick Pay (Form W-2) check box.
  4. Click the Earnings tab.
  1. In the Selected Items Window (upper-left), select the Employer this earning should be added to.
  2. In the Items Available from Selection Window (lower-left), select the check box next to the third party sick pay earning.
  3. The earning will now be listed on the left in the Selected Items Window, single click on the earning to display the Earning Detail.
  1. Under the Earning Detail (right side of the screen), enter the specifics about this earning for this employee including Effective date, Default Pay Earning, Rate, etc.
Note: If the amount changes, the leave rate can be left at $0.00 and instead, put in rate when enter payment in the pay run.
  1. Click Save.

Step C: Processing a Pay Run to track Third Party Payments:

Enter the disability pay in its own pay run using a Deduction/Benefit Frequency of None to verify no deductions are taken out of the check. Before processing/posting the pay run, view a prepayment report to verify the check has been entered correctly. When ready to process/post from the 6. Print Checks tab, under Printing Information, choose Assign Numbers Manually and then process/post to finish entering the after-the-fact check into the system.

Step D - Printing a 941:

When the 941 is printed for a quarter where third party disability payments were recorded, the information will automatically display in the appropriate rows and on the Schedule  B.

The only manual change that will need to be made on the 941 is to move the amount from line 7 to line 8. This amount represents the amount of taxes the third party payer deducted from the employees disability pay.

Step E - Printing a W-2:

The third party payer will notify you about the Social Security and Medicare tax amounts they deducted from the employees disability pay. These amounts will need to manually entered into box 4 and box 6. If the third party also deducts Federal W/H that amount will need to be manually entered into box 2. These amounts can be entered manually when the W-2/1099 Wizard is processed at the end of the year.

Option B: W-2 Provided by the Third Party Payer

Steps A - C: Follow the information from Option A (above).

In Step A-8, the options selected on the Taxes tab will differ when the third party will be filing the W-2. Please refer to the print screen below for an example of what should be selected, which is normally that all taxes are set to Exclude from Earning.

Check with your accountant to verify if you should calculate taxes for the employer when they have otherwise been excluded from the earning (by selecting the Exclude from Earning column). Select the Calculate Employer Share column to force the calculation of taxes for the employer, which is normally done for Social Security and Medicare.

Step D - Printing a 941:

When the 941 is printed for a quarter where third party disability payments were recorded, the employer's portion of taxes due (line 7) will automatically display in the appropriate rows. The following information will need to be manually entered in the 941 form:

  • The employee's share of FICA and Medicare taxes withheld by the third party should be entered as a negative amount in line 8.

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