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    Enter non-taxable third-party sick pay

    Article ID: 1000448
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    Overview

    You can enter non-taxable third-party sick pay on a payroll check in QuickBooks.

    Assumptions

    You have received the third-party sick pay amounts from your provider.

    Expected Outcome

    You will be able to track third-party sick pay on paychecks and report them on the correct tax forms.

    Details

    QuickBooks Pro and Premier:

    Create a new expense account.

    1. Choose Lists > Chart of Accounts.
    2. At the bottom left, click the Account button, and click New.
    3. In the Add New Account window, click Account Type, click Expense, and then click Continue.
    4. In the Add New Account window, enter the name of the new expense account (e.g., "Non-taxable third-party sick pay") in the Account Name field.
    5. Note: We recommend that you create this expense account as a sub-account of Payroll Expenses. This will associate it with payroll expenses and make it easier to find. To do this, select the Subaccount of checkbox, and from the drop-down arrow click Payroll Expenses.
    6. Click Save and Close.

    Create a new Addition payroll item.

    1. Choose Lists > Payroll Item List.
    2. Click Payroll Item, and click New.
    3. In the Select Setup Method window, click Custom Setup, and click Next.
    4. Click Addition, and click Next.
    5. In the Name Used In Paychecks And Payroll Reports window, in the Enter Name For Addition field, enter the name of the new Addition payroll item (e.g., "Add non-tax third-party sick"), and click Next.
    6. In the Expense account window, from the Enter The Account For Tracking This Expense list, select the name of the new expense account created in the first step.
    7. Click Next.
    8. In the Tax tracking Type window, from the drop-down list, select Non-taxable Sick Pay, and then click Next. (The paid amount will appear in box 12 of the W-2 form with the code J.)
    9. In the Taxes window, be sure that no taxes are selected, and click Next.
    10. In the Calculate Based On Quantity window, click Neither, and click Next.
    11. In the Gross vs. Net window, click Net Pay, and click Next.
    12. In the Default Rate And Limit window, click to clear both fields (they should be blank), and click Finish.

    Create a new Deduction payroll item.

    1. Choose Lists > Payroll Item List.
    2. Click the Payroll Item button, and select New.
    3. In the Select Setup Method window, click Custom Setup, and click Next.
    4. Click Deduction, and click Next.
    5. In the Name Used In Paychecks And Payroll Reports window, enter the name of the new payroll deduction item (e.g., "Deduct non-tax third-party sick"), and click Next.
    6. In the Agency For Employee-Paid Liability window, from the Liability account (employee-paid) drop-down list, click the name of the new expense account you created in the previous steps.
    7. Click Next.
    8. In the Tax Tracking Type window, from the drop-down list, click None, and click Next.
    9. In the Taxes window, be sure that no taxes are selected, and click Next.
    10. In the Calculate Based On Quantity window, select Neither, and click Next.
    11. In the Gross vs. net window, select Net Pay, and click Next.
    12. In the Default Rate And Limit window, click to clear both fields (they should be blank), and click Finish.

    Create paychecks.

    1. Choose Employees > Pay Employees, and then click Unscheduled Payroll.
    2. In the Enter Payroll Information window, select the checkbox next to the name of the employee who is to be paid, and click on the name in the Employee column.
    3. In the Review and Create Paychecks window, check if there are any earnings, and if there are, set them to zero.
    4. Click on the Open Paycheck Detail button.
    5. In the Preview Paycheck window, in the Other Payroll Items field, from the drop-down arrow, click the new addition item you created in the previous steps (e.g., "Add non-tax third-party sick"), and in the Rate column, enter the amount the employee was paid.
    6. On the next line in the Other Payroll Items field, from the drop-down arrow, click the new deduction item you created in the previous steps (e.g., "Deduct non-tax third-party sick"), and in the Rate column, enter the amount the employee was paid (a minus sign will automatically appear in front of this amount).
    7. Click Save & Close.
    8. In the Review and Create Paychecks window, click Create Paychecks.
    9. Print the paycheck and review the W-2 form.
    The Addition item allows the sick pay to be added to net so that taxes will not be calculated on the amount and the paid amount will show on the W-2. The Deduction item backs out the additional sick pay so that the net pay will not be increased on the paycheck.
    When creating your employee's W-2, Box 13 is checked only if you are Third Party Payer, or you are reporting amounts paid by a third party for sick pay. If that applies to you, when you begin to produce the W-2s, you are asked if any "special situations" apply. One of these is "third-party sick pay." You would select that checkbox, and in the review window, you will be given an opportunity to select that checkbox for specific employees. The 3 "special situations" that can be check marked in Box 13 are "Statutory Employee," "Retirement Plan," and "third-party sick pay."

    QuickBooks Simple Start:

    Create a new expense account.

    1. At the top of the screen, click Company and Lists.
    2. Click Chart Of Accounts.
    3. Under Related Activities select Create A New Account.
    4. In the Add New Account: Choose Account Type window, select Expense, and click Continue.
    5. In the Add New Account window, in the Account Name field, enter the name of the new expense account (e.g., "Non-taxable third-party sick pay").
    6. Click Save & Close.

    Create an addition payroll item.

    1. At the top of the screen, click the Payroll button.
    2. Click Setup and Maintain, and click View/Edit Payroll Items.
    3. Under Related Activities, click Add a Payroll Item.
    4. In the Select Setup Method window, click Custom Setup, and click Next.
    5. Under Payroll Item Type, select Addition, and click Next.
    6. In the Name Used In Paychecks And Payroll Reports window, in the Enter Name For Addition field, enter the name of the new payroll Addition item (e.g., "Add non-tax third-party sick"), and click Next.
    7. In the Expense Account window, from the Enter The Account For Tracking This Expense drop-down arrow, click the name of the new expense account you created in the previous steps, and click Next.
    8. In the Tax Tracking Type window, from the drop-down arrow, click Non-taxable Sick Pay, and click Next. (The paid amount will appear in box 12 of the W-2 form with the code J.)
    9. In the Taxes window, be sure that no taxes are selected, and click Next.
    10. In the Calculate Based On Quantity window, click Neither, and click Next
    11. In the Gross vs. Net window, click Net Pay, and click Next.
    12. In the Default Rate And Limit window, click to clear both fields (they should be blank), and click Finish.

    Create a new Deduction payroll item.

    1. At the top of the screen, click the Payroll button.
    2. Click Setup and Maintain, and click View/Edit Payroll Items.
    3. Under Payroll Activities, click Add a Payroll Item.
    4. In the Select Setup Method window, click Custom Setup, and click Next.
    5. Under Payroll Item Type, click Deduction, and click Next.
    6. In the Name Used In Paychecks And Payroll Reports window, enter the name of the new payroll deduction item (e.g., "Deduct non-tax third-party sick"), and click Next.
    7. In the Agency For Employee-paid Liability window, from the Liability Account (employee-paid) drop-down arrow, click the name of the new expense account you created in the previous steps, and click Next.
    8. In the Tax Tracking Type window, from the drop-down arrow, click None, and click Next.
    9. In the Taxes window, be sure that no taxes are selected, and click Next.
    10. In the Calculate Based On Quantity window, click Neither, and click Next.
    11. In the Gross vs. Net window, click Net Pay, and click Next.
    12. In the Default Rate And Limit window, click to clear both fields (they should be blank), and click Finish.

    Create paychecks.

    1. From the top of the screen, click the payroll button, and click Unscheduled Payroll.
    2. In the Enter Payroll Information window, select the checkbox next to the name of the employee who is to be paid, and click on the name in the Employee column.
    3. In the Review and Create Paychecks window, check if there are any earnings, and if there are, set them to zero.
    4. Click on the Open Paycheck Detail button.
    5. In the Preview Paycheck window, in the Other Payroll Items field, from the drop-down arrow, click the new addition item you created in the previous steps (e.g., "Add non-tax third-party sick"), and in the Rate column, enter the amount the employee was paid.
    6. On the next line in the Other Payroll Items field, from the drop-down arrow, click the new deduction item you created in the previous steps (e.g., "Deduct non-tax third-party sick"), and in the Rate column, enter the amount the employee was paid (a minus sign will automatically appear in front of this amount).
    7. Click Save & Close.
    8. In the Review and Create Paychecks window, click Create Paychecks.
    9. Print the paycheck, and review the W-2 form.
    The Addition item allows the sick pay to be added to net so that taxes will not be calculated on the amount and the paid amount will show on the W-2. The Deduction item backs out the additional sick pay so that the net pay will not be increased on the paycheck.
    When creating your employee's W-2, Box 13 is checked only if you are Third Party Payer, or you are reporting amounts paid by a third party for sick pay. If that applies to you, when you begin to produce the W-2s, you are asked if any "special situations" apply. One of these is "third-party sick pay." You would select that checkbox, and in the review window, you will be given an opportunity to select that checkbox for specific employees. The 3 "special situations" that can be check marked in Box 13 are "Statutory Employee," "Retirement Plan," and "third-party sick pay."

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