If the insurance company states that you have to report the sick leave payments as earnings and report on the W-2 and 941, then you will need to do the following:

1. Set up a deduction for the Third Party Sick Leave
2. Run a Payroll Cycle, entering the wages in the normal earning detail (or setting up a new one for the Third Party if desired).  The net amount of the check is put in the deduction since this is a zero check.  You can make the EFTPS (941) tax deposit for the total taxes owed, or you can reduce it by the amount the insurance company paid.  
   1. The 941 menu has Line 7.  Letter field.  Choose the B – Current quarter’s sick pay option.  
   2. Then, the Adjustment amount is where you would enter the amount of taxes that the insurance company paid for the employee’s taxes.  That is typically a negative amount.  This means the 941 will show the total amount of taxes owed, reduced by the amount that the insurance company paid for the employee.  
      1. If you paid the full amount of taxes on the Third-Party cycle you ran above, this method will show you have a refund coming because you paid the full amount even though the insurance company paid the employee portion.  
      2. If you reduce your taxes for the cycle by the employee portion (because the insurance company already paid that), your 941 should show a zero balance due.
3. On the W-2, the amount of the Third Party can be in the regular wage categories (Fed W/H Wage, SS Wage, Medicare Wage) and manually marked the employee payee record as Third Party Sick.  (In the Employee Master, on the Other tab, there is a field in the W-2 Boxes area you can check called Third-party sick pay.  Checking that field will check that box on the W-2 for you.

Notes:

• The deduction GL Liability Account could be posted to the wages expense account because they did not actually pay out the wages; however, if they are trying to match the W-2s back to the GL, it will not tie in.
• Also, if an employee is paid third-party sick leave each pay period, it should be handled accordingly in the actual quarter.  

Be careful: There is an option that employers can take to let the insurance company send out the W-2.  

• In one case, the insurance company will pay the employer part of the Social Security/Medicare. In this case, there is nothing done on the employer’s side.
• In another case, the insurance company will not pay the employer’s part of the Social Security/Medicare.  In this case, you will not put anything into Pak Accounting, but you will have to add the amount of the employer’s Social Security/Medicare to the 941.