Do I have to pay tax on sick pay?

If both you and your employer have paid for the premiums of the plan, only the amount you receive for your disability that is due to your employer's payments is reported as taxable income on your tax return. The remainder is tax free and should not be reported on your tax return. If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you; the premiums are considered paid by your employer and any benefits should be reported on your tax return.

If the amounts are taxable, you can submit a Form W-4S to the insurance company for IRS tax withholding, or make estimated tax payments by filing Form 1040ES.

If your benefits are taxable you should receive a Form W-2. Report the amount you receive on Line 7, Form 1040; Line 7, Form 1040A; or Line 1, Form 1040EZ. You must include in your taxable income on your tax return sick pay from any of the following:

Payments you receive from qualified long-term care insurance contracts are generally excluded from taxable income on your tax return as amounts received for personal injury or sickness. Also, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual called accelerated death benefits can be excluded from taxable income on your tax return.

You may be able to deduct on your tax return your out of pocket expenses for medical care above any reimbursements, if you are eligible to itemize your tax deductions. For more information see IRS Publication 502, Medical and Dental Expenses.