The Effect Of Sick Leave On Payroll Processing

Most companies must work around the occasional absence of workers due to sickness. Regardless of whether a company provides paid sick leave or not, employee sickness can affect how payroll is processed.

Sick pay is sometimes confused with disability pay or workers compensation. Sick pay received during a period of illness is intended to replace wages, not to compensate for an injury or to provide income during an extended period of disability. Most states do not mandate paid sick leave. However, several states have their own individual requirements mandating different levels of unpaid sick leave.

Unpaid medical leave

Most companies with 50 or more employees are subject to the Family and Medical Leave Act (FMLA). The federal law provides up to 12 weeks of unpaid leave for an employee to care for a new child or an immediate family member. The FMLA also applies to an employee who is prevented from working due to a medical condition. Even though not paid, an employee on medical leave might continue enrollment in your company's group insurance coverage.

Paid sick leave

Most employees experience only a few days of sickness per year, and some workers are never absent at all. According to the Bureau of Labor Statistics, 64 percent of all workers in private industry are entitled to at least one day of paid sick leave. Only five states have laws requiring employers to provide paid sick leave.

Payroll tax effects

Sick-leave pay that is paid by the employer in place of wages is subject to withholding for income taxes and employment taxes. However, if sick pay is paid through a plan funded by after-tax contributions made by the employee, it is not taxable. Nontaxable sick pay is not subject to withholding, but the amount should be reported at year-end in box 12 of the employee's Form W-2 along with the code "J."

Informing employees

Once a sick-leave plan is established, your employees should be notified of how many sick days they have available. Some sick-leave plans allow employees to roll over unused days into the following year. The number of days available might be included on each pay statement or on a periodic report.

The benefit of paid sick leave is likely to be a reduction in the spread of sickness in the workplace and possibly an increase of overall productivity. Contact a payroll service, such as Risley Annette CPA, for more information about the payroll aspects of employee benefits.