Definition
Sick pay is the compensation provided to employees to replace their regular wages during times when they are absent from work due to illness or personal injury. This compensation can be paid by employers, welfare funds, state sickness or disability funds, associations of employers or employees, or insurance companies. Importantly, sick pay is considered taxable income for employees, with certain exceptions for benefits received under some accident or health insurance policies.
Examples
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Employer Payment: An employer may pay an employee sick leave to ensure that they have financial support during absence due to illness.
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Welfare Fund: Some organizations have welfare funds that will provide sick pay to employees who are unable to work because of health issues.
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State Sickness/Disability Fund: In some regions, the state may provide financial support to employees who are sick or disabled and unable to work for an extended period.
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Association Benefits: An association of employers or employees may provide sick pay benefits. For instance, a trade union might have provisions for sick pay within their member benefits.
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Insurance Payments: If an employee has an insurance policy that they have paid for, they may receive sick pay from their insurance company.
Benefits received from an accident or health insurance policy where the employer has paid the premiums are generally not taxable.
Frequently Asked Questions (FAQs)
1. Is sick pay taxable? Yes, sick pay is generally considered taxable income for the employee, and it must be included in their taxable income for the year.
2. Are there any exceptions to the taxation of sick pay? Yes, benefits received under an accident or health insurance policy for which the employer paid the premiums are not considered taxable income.
3. Can sick pay come from sources other than the employer? Yes, sick pay can also be received from welfare funds, state sickness or disability funds, associations of employers or employees, or an insurance policy paid for by the employee.
4. How is sick pay reported for tax purposes? Employers typically report sick pay on the employee’s Form W-2, which includes the total taxable sick pay amount.
5. Does an employee have to pay taxes on sick pay if it is received from a state fund or association? Yes, sick pay from state sickness or disability funds or associations is typically treated as taxable income.
Related Terms
- Disability Insurance: A type of insurance plan that provides income to employees who are unable to work due to a disability.
- Workers’ Compensation: A form of insurance providing wage replacement and medical benefits to employees injured in the course of employment.
- Employee Benefits: Various types of non-wage compensation provided to employees in addition to their normal wages or salaries.
- Health Insurance: Insurance coverage that pays for medical and surgical expenses incurred by the insured.
Online References
Suggested Books for Further Studies
- “Employee Benefits Design and Compensation (Irwin/McGraw-Hill Series in Finance, Insurance and Real Estate)” by Bashker D. Biswas
- “Tax-Free Exit: Exit Planning Basics for Business Owners” by Chadwick Hagan
- “The Employee Benefits Answer Book: An Indispensable Guide for Managers and Business Owners” by Rebecca Mazin
Fundamentals of Sick Pay: Employee Compensation Basics Quiz
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