Is Sick Pay Taxable? Employer, Third-Party, and FICA Rules

Sick pay is usually taxable, but not always. Whether you owe federal income tax on it depends on who paid the premiums for the plan behind the payments, which program is actually cutting the check, and in some cases how long you’ve been off work. Employer-funded sick pay is treated as regular wages. Benefits from a disability policy you paid for yourself with after-tax dollars are generally tax-free. Workers’ compensation is excluded entirely. Everything else falls somewhere in between, and the rules shifted for state paid-leave programs starting in 2025.

Sick Pay Your Employer Pays Directly

When your employer keeps paying you during an illness, that money is taxed exactly like your normal paycheck. It’s subject to federal income tax withholding, Social Security tax at 6.2%, and Medicare tax at 1.45%. Your employer handles the withholding and deposits the way it would for regular wages.¹

This covers formal sick leave plans, paid-time-off used for illness, and simple continued salary while you’re out. It all lands in Box 1 of your W-2 with the rest of your wages.²

Third-Party Sick Pay: Who Paid the Premiums Decides

When an insurance company or other third party pays you under a disability policy, taxability comes down to one question: who paid the premiums?

If your employer paid all the premiums, the full benefit is taxable as ordinary income. The premium payments were a tax-free benefit to you, so the IRS taxes the money on the way out.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 funded the premiums.⁴
If premiums were split, only the portion of benefits tied to your employer’s share is taxable. A 60/40 employer/employee split means 60% of each payment is taxable income.¹

Watch out for one trap. If you pay your share of premiums through a Section 125 cafeteria plan using pre-tax payroll deductions, the IRS treats those premiums as employer-paid. Your benefits are then fully taxable, even though the deductions came out of your paycheck.⁵ Check a pay stub. If the disability premium reduces your taxable wages, you’re paying pre-tax, and the benefits will be fully taxable.

The Six-Month FICA Cutoff

Even taxable third-party sick pay stops being subject to Social Security and Medicare taxes at a point. Sick pay is exempt from FICA and federal unemployment tax when it’s paid 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. Payments through June 2026 are subject to FICA. Starting in July 2026, the Social Security and Medicare withholding drops off, though federal income tax may still apply. If you go back to work briefly and then out again, the six-month clock resets from the month you last worked.⁷

If you’ve been out for a long stretch, look at your pay statements after the six-month mark. Your net check should be a little larger once FICA stops.

Workers’ Compensation Is Not Taxed

Workers’ compensation for a job-related illness or injury is fully excluded from federal gross income under Section 104(a)(1). The exclusion covers payments under any state or federal workers’ compensation act, and you don’t report the payments on your return at all.⁴

Two limits are worth knowing. The exclusion doesn’t cover a retirement pension calculated by age or years of service, even if the retirement was triggered by a workplace injury. And it doesn’t cover any amount above what the applicable workers’ compensation law provides, or payments for injuries that aren’t work-related.⁸

Social Security Disability Benefits

SSDI is taxed the same way Social Security retirement benefits are. Whether you owe depends on your provisional income: adjusted gross income, plus any tax-exempt interest, plus half your Social Security benefits.⁹

Single filers: provisional income between $25,000 and $34,000 makes up to 50% of SSDI taxable. Above $34,000, up to 85% is taxable.
Married filing jointly: the 50% band runs from $32,000 to $44,000. Above $44,000, up to 85% is taxable.
Married filing separately while living with your spouse: the base amount is $0, so up to 85% of benefits are taxable no matter your income.¹⁰

If SSDI is your only income, you’re probably below the thresholds and owe nothing. A working spouse, investment income, or a pension can push you across.

State Paid Family and Medical Leave

Several states run their own temporary disability or paid family and medical leave programs funded through payroll deductions. IRS Revenue Ruling 2025-4 clarified the federal treatment for payments made on or after January 1, 2025.¹¹

The ruling separates two kinds of leave:

Family leave benefits (bonding with a new child, caring for a seriously ill family member, and similar) are fully included in gross income. They aren’t treated as wages, so no FICA is withheld.
Medical leave benefits (for your own illness or injury) follow the premium payer rule. The share tied to your after-tax contributions is excluded from income under Section 104(a)(3). The share tied to employer contributions is taxable under Section 105 and treated as third-party sick pay for employment tax purposes.¹¹

State programs usually report these benefits on Form 1099-G.¹² Most don’t withhold federal income tax automatically, so plan on estimated payments or adjust withholding at another job.

If You’re Self-Employed

Buy your own disability policy with after-tax dollars, and any benefits are tax-free. Same premium-payer logic: you paid, so you don’t pay again.¹³

The self-employed health insurance deduction on Schedule 1 covers medical, dental, vision, and long-term care premiums, but generally not disability insurance.¹⁴ That’s not a bad outcome. Because you’re paying premiums with after-tax money, benefits stay tax-free during a stretch when your income has already dropped.

How Sick Pay Shows Up on Your Tax Forms

The paperwork depends on the source:

Employer-paid sick pay is included in Boxes 1, 3, and 5 of your W-2 with regular wages.²
Third-party sick pay comes on a W-2 issued by the third party or your employer, depending on how liability was allocated. Any nontaxable portion tied to your after-tax contributions appears in Box 12 with Code J.²
State PFML benefits arrive on Form 1099-G.¹²
SSDI is reported on Form SSA-1099.
Workers’ compensation isn’t reported on your return.

If you get a W-2 for third-party sick pay and think some of it should be nontaxable because you paid premiums with after-tax dollars, check that Code J shows in Box 12 and that the nontaxable amount is out of Box 1. Errors are common when employers change carriers mid-year. Catching them before you file is easier than amending later.

Withholding and Estimated Tax

Employer-paid sick pay withholds automatically. Third-party sick pay does not, unless you ask. To have federal income tax withheld from third-party payments, submit Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, to the payer. You choose a flat dollar amount for each payment.¹⁵ Withholding takes effect within seven days of filing the form with the payer.¹⁶

Without a W-4S, plan on quarterly estimated payments using Form 1040-ES. The IRS expects estimated payments if you’ll owe $1,000 or more after subtracting withholding and refundable credits, and the underpayment penalty is calculated by quarter, so paying in full at filing doesn’t erase it.¹⁷ If you know your sick pay is taxable and expects to keep coming, filing the 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