What Is Third-Party Sick Pay on Your W-2?

Third-party sick pay on a W-2 is disability income paid to you by an insurance company (not your employer) while illness or injury keeps you off work, and the W-2 reports it because part or all of it is usually taxable wages. How much is taxable depends on who paid the premiums for the disability policy, and the form uses specific boxes to separate the taxable portion from the tax-free portion.

What the Payment Actually Is

Your employer buys a disability policy (or self-insures through a third-party administrator), and when a qualifying medical claim takes you off the job, the insurer pays you directly from its own funds instead of your employer running payroll. The insurer verifies the claim, calculates the benefit under the policy, and sends payments on its schedule. The money is compensation for being unable to work rather than for hours worked, and the IRS treats it differently depending on how the underlying coverage was funded.

How Much of It Is Taxable

The taxability question turns on a single fact: who paid the premiums.

If your employer paid the full premium, the benefits are taxable income to you. Federal law includes in gross income any amounts received through an employer-funded accident or health plan to the extent they trace to employer contributions.¹

If you paid the full premium with after-tax dollars, the benefits are generally tax-free, because you already paid tax on the money that bought the coverage.²

Split funding is common and is where reporting mistakes cluster. If your employer paid 60 percent of the premium and you paid 40 percent with after-tax money, roughly 60 percent of each benefit check is taxable and 40 percent is not.² The two portions land in different places on your W-2.

The taxable portion is also subject to Social Security tax up to the annual wage base of $184,500 in 2026 and to Medicare tax on all amounts, like regular wages.³

One carve-out is worth knowing. If a payment compensates you specifically for the permanent loss or loss of use of a body part or bodily function, or for permanent disfigurement, it is not taxable even when your employer paid the entire premium. The payment must be calculated based on the nature of the injury, not on how many days of work you missed.⁴ A lump sum tied to loss of a limb qualifies; weekly checks sized to replace your salary during recovery typically do not.

Reading the W-2

Several boxes work together to tell the full story.

Box 13 has a checkbox labeled “Third-party sick pay.” That box being checked is what flags the form as containing disability insurance payments rather than ordinary wages.⁵

Box 12, Code J shows the non-taxable portion. That is the piece of your benefit that traces to premiums you paid yourself with after-tax dollars. The payer instructions specifically direct that sick pay “not includible in income because the employee contributed to the sick pay plan” go here and be excluded from Boxes 1, 3, and 5.⁵

The taxable portion rolls into the regular wage boxes: Box 1 for federal taxable wages, Box 3 for Social Security wages up to the annual cap, and Box 5 for Medicare wages.³ To sanity-check the numbers, add the Code J amount to Box 1. That total should approximate the gross disability benefit the insurer paid you for the year.

Why You Might Get Two W-2s

Whose name appears on the W-2 depends on whether the insurance company acted as your employer’s agent or independently, and that decision drives whether you get one W-2 or two for the year.

If the insurer acted as an agent, the W-2 shows your employer’s name, address, and EIN. Your employer may combine the sick pay with your regular wages on a single W-2 or issue a separate one.
If the insurer acted independently and kept the tax liability, it reports the sick pay on its own filings and issues you a W-2 under the insurer’s own name and EIN. You’ll get two W-2s that year: one from your employer for wages you earned, one from the insurer for the sick pay.
If the insurer acted independently but the employer-share tax liability was transferred back to your employer, your employer issues the W-2 and the insurer files Form 8922 to reconcile the two sides.⁶

You don’t file Form 8922 yourself. Knowing it exists just explains why your employer or the insurer may contact you to verify amounts. The detailed reporting rules payers follow live in IRS Publication 15-A.⁷

Getting Tax Withheld So You Don’t Owe in April

Many insurance companies do not automatically withhold federal income tax from disability payments. If nothing is withheld all year, you can face a large tax bill in April plus an estimated-tax penalty.

To avoid that, submit Form W-4S (Request for Federal Income Tax Withholding From Sick Pay) directly to the insurance company paying your benefits.⁸ The form lets you specify a flat dollar amount per payment. The IRS sets minimums of at least $4 per day, $20 per week, or $88 per month depending on your payment schedule. Requests must be in whole dollars, and the withholding cannot reduce any single payment below $10.⁹

If the insurer won’t accept a W-4S, or the withholding isn’t enough to cover your liability, quarterly estimated tax payments to the IRS are the fallback. The general rule is that at least 90 percent of your current-year tax needs to be covered through withholding and estimated payments combined to avoid the underpayment penalty.¹⁰

When Social Security and Medicare Taxes Stop

Even when third-party sick pay stays taxable for income tax purposes, it eventually drops out of Social Security and Medicare (FICA) taxes. Federal law excludes sick pay from FICA once more than six calendar months have passed since the last calendar month in which you actually worked.¹¹

The IRS counts by calendar months, not days. If your last day of work was December 5, the last month you worked is December, and any sick pay received after June 30 is FICA-exempt. One catch: if you return to work for even a single day, the six-month clock restarts from that month.⁷ Income tax still applies after the six-month mark, but dropping FICA means noticeably more take-home on long-term disability.

Filing Your Return

Gather every document and match them against each other before entering anything. That means your employer’s W-2 for any regular wages, any separate W-2 from the insurance carrier for the disability payments, and any year-end summary the insurer mailed showing gross benefits paid and taxes withheld.

Cross-reference the insurer’s summary against the W-2. The taxable amount in Box 1 should reconcile with the taxable benefit total from the summary once you account for any non-taxable portion in Box 12, Code J. Discrepancies are the most common trigger for automated IRS matching notices, because the IRS receives copies of every W-2 and compares them against what you report.

If you received two W-2s, both go on your return. The taxable sick pay from the insurer and the regular wages from your employer combine into your total income. Double-counting is the other frequent mistake: if the employer’s W-2 already includes the sick pay because the insurer acted as an agent, adding a separate insurer statement on top would inflate your income. Check Box 13 on each W-2 to see which form actually carries the third-party sick pay, and don’t enter the same dollars twice. State treatment varies, so check whether your state follows the federal rules or taxes disability benefits differently.

1
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
2
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
3
Social Security Administration. Contribution and Benefit Base
4
Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
5
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
6
Internal Revenue Service. About Form 8922 – Third-Party Sick Pay Recap
7
Internal Revenue Service. Employer’s Supplemental Tax Guide – Section 6 Sick Pay Reporting
8
Internal Revenue Service. About Form W-4S – Request for Federal Income Tax Withholding From Sick Pay
9
Internal Revenue Service. 2026 Form W-4S – Request for Federal Income Tax Withholding From Sick Pay
10
Internal Revenue Service. Pay As You Go, So You Won’t Owe – A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty
11
Office of the Law Revision Counsel. 26 USC 3121 – Definitions