Is Sick Pay Taxable? Third-Party Rules and FICA Cutoff

Is sick pay taxable? In most cases, yes. Money your employer pays you while you’re out sick is treated as regular wages. Benefits from a disability policy you paid for yourself with after-tax dollars are generally tax-free. Between those two poles sit third-party insurers, state paid-leave programs, Social Security disability, and workers’ compensation, each with its own rule. The practical answer for your situation turns on who funded the policy, how long you’ve been out of work, and which program is sending the check.

Sick Pay Your Employer Pays You Directly

When your employer keeps paying you while you’re out sick, the money is taxed the same as your paycheck. Federal income tax withholding applies, along with Social Security tax at 6.2% and Medicare tax at 1.45%. Your employer handles the withholding and deposits.¹

This covers formal sick leave plans, PTO banks, and simple salary continuation. The payments appear in Box 1 of your W-2 with your other wages and go on Form 1040 as wage income.²

Third-Party Sick Pay and Who Paid the Premiums

When the check comes from an insurance company rather than your employer, taxability turns on a single question: who paid the premiums for the policy?

If your employer paid all the premiums, the entire benefit is taxable as ordinary income. The premium was a tax-free benefit to you, so the IRS taxes the money when you receive it.³
If you paid all the premiums with after-tax dollars, the benefits are entirely tax-free. You already paid tax on the money that bought the policy.⁴
If you and your employer split the cost, only the share tied to your employer’s portion of the premiums is taxable. Employer paid 60%, you paid 40% after-tax: 60% of each benefit payment is taxable.¹

One trap catches people who thought they were paying for their own coverage. If your premiums come out of your paycheck through a Section 125 cafeteria plan on a pre-tax basis, the IRS treats those premiums as if your employer paid them, and the benefits are fully taxable.⁵ Look at your pay stub. If the disability premium reduces your taxable wages, the deduction is pre-tax, and the benefit will be taxable.

The Six-Month FICA Cutoff

Social Security and Medicare taxes don’t follow sick pay forever. Payments become exempt from FICA (and from federal unemployment tax) once they’re made more than six calendar months after the last calendar month you worked.⁶

Say your last day of work was December 5, 2025. The clock runs from December. Sick pay you receive through June 2026 is subject to FICA. Starting in July 2026, the Social Security and Medicare withholding drops off. Federal income tax may still apply under the premium payer rule above. If you return to work and then go back on leave, the clock resets from the month you last worked.⁷

If you’ve been out for an extended period, check your pay statement after the six-month mark. The net amount should rise once FICA stops being withheld.

Workers’ Compensation, SSDI, and State Paid Leave

Several programs feel like sick pay but follow their own rules.

Workers’ compensation. Benefits for a job-related illness or injury are fully excluded from federal gross income under Section 104(a)(1) of the Internal Revenue Code, and the exclusion applies to payments under any state or federal workers’ compensation act.⁴ You don’t report these payments on your return at all. The exclusion does not cover retirement pensions calculated by age or years of service, even if a workplace injury triggered the retirement, and it does not cover injuries or illnesses that are not work-related.⁸

Social Security Disability Insurance. SSDI follows the same tax rules as Social Security retirement. Whether you owe tax depends on your “provisional income,” which combines your adjusted gross income, any nontaxable interest, and half of your Social Security benefits.⁹ For single filers, up to 50% of benefits are taxable when provisional income runs between $25,000 and $34,000, and up to 85% above $34,000. For joint filers, the brackets are $32,000 to $44,000 and above $44,000. Married filing separately while living with your spouse carries a base amount of $0, so up to 85% of benefits are taxable regardless of income.¹⁰ If SSDI is your only income, you likely owe nothing. A working spouse or investment income can push you over.

State paid family and medical leave. IRS Revenue Ruling 2025-4, effective for payments made on or after January 1, 2025, clarified the federal treatment of state TDI and PFML benefits. Family leave benefits (caring for a new child or a seriously ill family member) are fully included in gross income under Section 61 regardless of who paid the premiums, but they are not wages for employment tax purposes, so no FICA is withheld. Medical leave benefits (your own illness or injury) follow the premium payer rule: the portion tied to your after-tax contributions is excluded under Section 104(a)(3), and the portion tied to employer contributions is taxable under Section 105 and treated as third-party sick pay for employment tax purposes.¹¹ State programs typically report these benefits on Form 1099-G and often do not withhold federal income tax automatically.¹²

Self-Employed Disability Policies

If you’re self-employed and buy a disability policy with after-tax dollars, the benefits are not taxable.¹³ The self-employed health insurance deduction on Schedule 1 covers medical, dental, vision, and long-term care premiums, but disability insurance premiums generally are not eligible.¹⁴ The inability to deduct is the reason the benefit comes out tax-free: you paid with after-tax money. Deducting the premium as a business expense would flip the benefits into taxable income.

How Sick Pay Shows Up on Your Tax Forms

The paperwork follows the source of the payment.

Employer-paid sick pay is included in Boxes 1, 3, and 5 of your W-2 with your regular wages.²
Third-party sick pay also comes on a W-2, issued by the third party or your employer depending on how they allocated liability. Any portion that is nontaxable because you contributed with after-tax dollars appears in Box 12 with Code J.²
State PFML benefits arrive on Form 1099-G.¹²
SSDI benefits come on Form SSA-1099.
Workers’ compensation does not go on your return.

If a W-2 shows third-party sick pay and you believe part of it should be nontaxable because you paid premiums after tax, confirm that Box 12, Code J reflects the nontaxable portion and that Box 1 excludes it. These numbers get miscoded when employers change insurance carriers mid-year, and fixing a form before you file is easier than amending later.

Withholding and Estimated Taxes

Employer-paid sick pay has withholding built in. Third-party sick pay does not. A third-party payer only withholds federal income tax if you ask by submitting Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, specifying a flat dollar amount per payment.¹⁵ Withholding takes effect within seven days of submitting the form.¹⁶

Without a W-4S on file, you may need to make quarterly estimated payments on Form 1040-ES. The IRS generally expects estimated payments if you will owe $1,000 or more after subtracting withholding and refundable credits, and missed quarterly payments trigger a penalty calculated on each quarter’s shortfall even if you pay in full at filing.¹⁷ For ongoing taxable sick pay, filing a W-4S is the simpler path.

1
Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income
2
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
3
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
4
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
5
Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
6
Internal Revenue Service. Publication 15-A (2026), Employers Supplemental Tax Guide
7
Internal Revenue Service. Publication 15-A (2026), Employers Supplemental Tax Guide
8
eCFR. 26 CFR 1.104-1 – Compensation for Injuries or Sickness
9
Internal Revenue Service. Regular and Disability Benefits
10
Office of the Law Revision Counsel. 26 USC 86 – Social Security and Tier 1 Railroad Retirement Benefits
11
Internal Revenue Service. Revenue Ruling 2025-4 – Federal Income and Employment Tax Treatment of Contributions and Benefits Paid Under a State Paid Family and Medical Leave Statute
12
Internal Revenue Service. Form 1099-G – Certain Government Payments
13
Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
14
Internal Revenue Service. Instructions for Form 7206 – Self-Employed Health Insurance Deduction
15
Internal Revenue Service. About Form W-4S, Request for Federal Income Tax Withholding From Sick Pay
16
Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source
17
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax