Tax Facts

351 / Are wage continuation payments under an accident and health plan subject to withholding?

Employers or former employers must withhold tax from payments made to an employee for a period of absence from work due to injury or sickness. If an employer has shifted the insurance risk to an insurer or trust, no income tax need be withheld from wage continuation payments that an insurance company or a separate trust makes on behalf of the employer.1

Amounts paid as sick pay during a temporary absence under a plan to which the employer is a party may be withheld by a third party payor at the employee’s request.2

Amounts paid by a third party are wages subject to mandatory withholding if the insurance risk is not shifted by the arrangement because the third party is acting as the employer’s agent if the employer reimburses the insurance company or trust on a cost plus fee basis.3

1. Treas. Reg. § 31.3401(a)-1(b)(8); Rev. Rul. 77-89, 1977-1 CB 300.

2. IRC § 3402(o); Treas. Reg. § 31.3402(o)-3.

Tax Facts Premium Tools
Calculators
100+ calculators specifically designed to help you easily assist clients with specific planning situations and calculations.
Practice Guidance
Designed to help you discover new ways for which to build and maintain client relationships.
Concepts Illustrated
Specifically designed to help you easily assist clients with specific planning situations and calculations.
Tax Facts Archives
Access to the entire library of Tax Facts dating back to 2012 allowing you to look up the exact tax figures from prior years.