📘 Step-by-Step Guide: Recording Third-Party Sick Pay & FICA in QuickBooks Online

What is Third-Party Sick Pay?

When an insurance provider (like AFLAC, Guardian, or The Hartford) pays your employee sick leave directly, that’s called third-party sick pay. Even though you didn’t write the check, the IRS still requires you to:

• Report the wages on the employee’s W-2

• Remit FICA taxes (Social Security and Medicare)

• Reflect the transaction accurately in your books

Scenario:

• Sick pay amount paid by insurer: $2,000

• Subject to FICA

• You (the employer) are submitting both employee and employer portions of:

  • Social Security (6.2%): $124

  • Medicare (1.45%): $29

  • Total FICA: $306

🧾 Step-by-Step Instructions in QuickBooks Online

✅ Step 1: Create or Use These Accounts

Account Name	Type	Purpose
Wages Expense – Sick Pay	Expense	Gross third-party wages
Payroll Tax Expense – Employer FICA	Expense	Employer share of FICA
Social Security Tax Payable (Employee)	Current Liability	Employee FICA withheld
Medicare Tax Payable (Employee)	Current Liability	Employee FICA withheld
Social Security Tax Payable (Employer)	Current Liability	Employer portion
Medicare Tax Payable (Employer)	Current Liability	Employer portion
Third-Party Sick Pay Clearing	Liability (Other)	To offset wages paid by insurance
Other Income – Third-Party Sick Pay	Other Income	If employer does not reimburse the insurer

✅ Step 2: Record the Journal Entry

• Go to + New → Journal Entry

Account	Debit	Credit
Wages Expense - Sick Pay	$2,000.00
Payroll Tax Expense - Employer FICA	$153.00
Social Security Tax Payable (EE)		$124.00
Medicare Tax Payable (EE)		$29.00
Social Security Tax Payable (ER)		$124.00
Medicare Tax Payable (ER)		$29.00
Third-Party Sick Pay Clearing		$1,847.00

📌 This entry:

• Reflects the gross sick wages

• Captures your FICA tax liabilities

• Offsets cash using a clearing account (since you didn’t issue the paycheck)

  
  

✅ Step 3: Pay the FICA Taxes

• Go to + New → Expense

Account	Amount
Social Security Tax Payable (Emp)	$124.00
Medicare Tax Payable (Emp)	$29.00
Social Security Tax Payable (Er)	$124.00
Medicare Tax Payable (Er)	$29.00
Bank Account (used to pay IRS)	$306.00

✅ Step 4: Clear the “Third-Party Sick Pay Clearing” Account

Option A: If You Reimbursed the Insurance Company

• Go to + New → Expense or Check

Account	Amount
Third-Party Sick Pay Clearing	$1,847.00
Bank Account	$1,847.00

Option B: If You Did Not Reimburse the Insurance Company:

• Go to + New → Journal Entry

Account	Debit	Credit
Third-Party Sick Pay Clearing	$1,847.00
Other Income – Third-Party Sick Pay		$1,847.00

📌 Use this method to show non-cash wages that the business is not financially responsible for reimbursing.

✅ Bonus: W-2 Reporting Tips

Make sure your payroll system or provider handles these correctly:

• Box 1: Report gross wages (e.g., $2,000)

• Boxes 3 & 5: Include FICA wages if applicable

• Box 12, Code J: For nontaxable sick pay

• Box 13: Check the “Third-Party Sick Pay” box

  
  

🧠 Final Thoughts

Recording third-party sick pay isn’t just a “back office” task—it affects tax payments, financial reporting, and W-2 accuracy. If it’s not handled correctly, you risk:

• Overstated wages or tax liabilities

• Missed deductions or penalties

• W-2Cs at year-end

  
  

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