Sick pay count as earned income?
Ernie Klein
$12,000 sick pay.
Taxpayer received a W2 with $12,000 in box 1 and "Third Party Sick Pay"
checked in box 13.
Does the $12K sick pay count as earned income toward EIC?
TurboTax sure thinks it does, even with box 13 checked, TT calculates a
$4,700 refund (HOH), even though taxpayer paid and owed no tax for 2007.
I can't find anything in the Pubs that speak to sick pay counting (or
not counting) toward EIC. Taxpayer could sure use the extra $4.7K if
this is correct.
--
-Ernie-
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removep...@yahoo.com
> Taxpayer had no income during 2007 except non-taxable disability pay and
> $12,000 sick pay.
>
> Taxpayer received a W2 with $12,000 in box 1 and "Third Party Sick Pay"
> checked in box 13.
>
> Does the $12K sick pay count as earned income toward EIC?
Long-term disability benefits received prior to minimum retirement age
counts towards the EITC. Does sick pay fall into that category?
cpaba...@yahoo.com
Sick pay received for time off while working (i.e., short-term
illness) shall be considered earned income when the person is still
considered an employee by the employer and the person will be
returning to work when recovered.
Milt Baker CPA
========================================= MODERATOR'S COMMENT:
Please delete unnecessary text from the prior message when responding.
Ernie Klein
<e0144cad-317f-42d1...@b5g2000pri.googlegroups.com>,
"removep...@yahoo.com" <removep...@yahoo.com> wrote:
> On Mar 29, 4:56 pm, Ernie Klein <eckl...@pacbell.net> wrote:
>
> > Taxpayer had no income during 2007 except non-taxable disability pay and
> > $12,000 sick pay.
> >
> > Taxpayer received a W2 with $12,000 in box 1 and "Third Party Sick Pay"
> > checked in box 13.
> >
> > Does the $12K sick pay count as earned income toward EIC?
>
> Long-term disability benefits received prior to minimum retirement age
> counts towards the EITC. Does sick pay fall into that category?
That's kind of what I am asking.
Pub 596 (EIC) says "If you retired on disability, benefits you receive
under your employer零 disability retirement plan are considered earned
income until you reach minimum retirement age."
That doesn't apply here because the taxpayer in question is neither
retired or permanently disabled.
Pub 15 (Employers Guide) talks about sick pay and third party sick pay
which is usually defined as an insurance to cover sickness or injury to
an employee and are to be reported and taxed as wages. There is also
disability insurance to cover long term or permanent disabilities.
Pub 596 (EIC) says "Payments you received from a disability insurance
policy that you paid the premiums for are not earned income."
Does third party sick pay == disability insurance?
The free online version of Turbotax, TaxAct, and TaxCut all give a EIC
refund of $4,716 when presented with W2 data of $12K in box 1 and "Third
Part Sick Pay" in Box 13 - at least they are consistent - my question
is are they correct?
--
-Ernie-
Ernie Klein
<7683a4f4-0afb-4da3...@m36g2000hse.googlegroups.com>,
cpaba...@yahoo.com wrote:
> On Mar 29, 7:56 pm, Ernie Klein <eckl...@pacbell.net> wrote:
> > Taxpayer had no income during 2007 except non-taxable disability pay and
> > $12,000 sick pay.
> >
> > Taxpayer received a W2 with $12,000 in box 1 and "Third Party Sick Pay"
> > checked in box 13.
> >
> > Does the $12K sick pay count as earned income toward EIC?
> Sick pay received for time off while working (i.e., short-term
> illness) shall be considered earned income when the person is still
> considered an employee by the employer and the person will be
> returning to work when recovered.
Do you have a reference in a Pub or code?
What I am concerned about is the taxpayer who was injured toward the end
of 2006 and had to have surgery. Taxpayer received sick pay for the
first part of 2007 (until it ran out), but had to have a second,
unrelated surgery (for a totally different reason) and could not return
to work at all during 2007, so the sick pay was the only taxable income.
--
-Ernie-
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
Ernie Klein
Ernie Klein <eck...@pacbell.net> wrote:
> Taxpayer had no income during 2007 except non-taxable disability pay and
> $12,000 sick pay.
>
> Taxpayer received a W2 with $12,000 in box 1 and "Third Party Sick Pay"
> checked in box 13.
>
> Does the $12K sick pay count as earned income toward EIC?
>
> TurboTax sure thinks it does, even with box 13 checked, TT calculates a
> $4,700 refund (HOH), even though taxpayer paid and owed no tax for 2007.
> I can't find anything in the Pubs that speak to sick pay counting (or
> not counting) toward EIC. Taxpayer could sure use the extra $4.7K if
> this is correct.
Well, I called the IRS today (twice) to try to get an answer, and as
could be predicted I received two opposing answers.
On my first call (after putting me on hold for 10 minutes) the person
wanted to know if the employee or employer paid for the sick pay policy.
I said I didn't know but I thought that it was the employer. He said
that, in that case, as long as the sick pay was taxable, then it was
indeed to be counted as earned income when computing the EIC.
I later learned that the sick pay is actually a UNION benefit, so I
called the IRS again. This time, even before I got to the point of it
being a union benefit I was told that sick pay is never counted as
earned income for calculating EIC.
I pointed out that on my earlier call I received a different answer.
She put me on hold. When she came back she said her supervisor agreed
with her answer that is was not earned income.
Having done a bit more research before I called the second time, I
asked, then where and how do I exclude it from EIC, when the 1040
instructions for EIC says to use the amount from line 7 (which by
definition has to include ALL W2 taxable income) and then subtract 1)
Taxable Scholarship or grant, 2) Amount received while an inmate, or 3)
Amount received as a pension... Those are the only choices - so where
and how can I subtract the third party sick pay.
We also discussed Pub 596 which says earned income includes "Wages,
salaries, tips, and other taxable employee pay. Employee pay is earned
income only if it is taxable." If sick pay is to replace wages and is
taxable, then why isn't it included in "other taxable employee pay" ?
Pub 596 also has a section that says what IS NOT earned income, and none
of the exclusions would seem to cover sick pay.
She said, "Good points", and put me back on hold. When she came back,
she said she would take my name and address and mail (or email) me an
answer in 7-14 days from the "experts".
So I am still waiting for a definitive answer.
Stuart Bronstein
> I later learned that the sick pay is actually a UNION benefit, so
> I called the IRS again. This time, even before I got to the point
> of it being a union benefit I was told that sick pay is never
> counted as earned income for calculating EIC.
I was able to find one only tax court case that deals with the issue of
sick pay and earned income, though not in the context of the earned
income credit. In that case, Woodford v. Commissioner 71 T.C. 991
(1979), the court held that sick pay is earned income unless
specifically excluded by law.
Sick pay is specifically determined to be earned income for withholding
purposes under IRC §3402(o). I found no regulation dealing with the
issue.
It seems to me that sick leave is more in the nature of payment for
lost wages rather than payment for personal injuries, so I'd guess it
should be included in earned income. But the law is not clear and I
was able to find nothing authoritative either way (I didn't look
through IRS publications or rulings). So you might be justified in
taking either position.
Stu
Ernie Klein
Stuart Bronstein <spam...@lexregia.com> wrote:
> Ernie Klein <eck...@pacbell.net> wrote:
>
> > I later learned that the sick pay is actually a UNION benefit, so
> > I called the IRS again. This time, even before I got to the point
> > of it being a union benefit I was told that sick pay is never
> > counted as earned income for calculating EIC.
> I was able to find one only tax court case that deals with the issue of
> sick pay and earned income, though not in the context of the earned
> income credit. In that case, Woodford v. Commissioner 71 T.C. 991
> (1979), the court held that sick pay is earned income unless
> specifically excluded by law.
>
> Sick pay is specifically determined to be earned income for withholding
> purposes under IRC §3402(o). I found no regulation dealing with the
> issue.
>
That's good information, thanks.
> It seems to me that sick leave is more in the nature of payment for
> lost wages rather than payment for personal injuries, so I'd guess it
> should be included in earned income. But the law is not clear and I
> was able to find nothing authoritative either way (I didn't look
> through IRS publications or rulings). So you might be justified in
> taking either position.
I am not sure that sick leave is the same at third party sick pay. When
I think of sick leave I think of an employer who gives sick days as a
benefit that can be accumulated. When an employee is sick their pay
continues as they use up their sick days but it is not accounted for in
any special way on the employees w2 form - it is only an employer
accounting.
Third party sick pay is paid by an insurance company whose premiums are
paid as an employment benefit by the employer or in the case of the
taxpayer I am talking about, by the employees union as a union benefit.
Perhaps the best way to handle this is not to apply for the EIC at all
but simply ask the IRS to figure the EIC by paper filing and writing
"EIC" on the dotted line next to line 66a per the 1040 instructions.
That would put the onus on the IRS rather than the taxpayer to figure
the correct EIC and do the right thing. (My guess is that the tax
software the IRS uses to figure this would count this as earned income
just like all the other tax programs do and the taxpayer would get the
EIC credit without anyone giving it a second thought.) That way, if the
taxpayer is ever audited and higher-ups say, on no, that is not allowed,
the taxpayer can say, "I didn't do it -you did".
--
-Ernie-
Stuart Bronstein
> Third party sick pay is paid by an insurance company whose
> premiums are paid as an employment benefit by the employer or in
> the case of the taxpayer I am talking about, by the employees
> union as a union benefit.
Good point. I hadn't considered that.
> Perhaps the best way to handle this is not to apply for the EIC at
> all but simply ask the IRS to figure the EIC by paper filing and
> writing "EIC" on the dotted line next to line 66a per the 1040
> instructions. That would put the onus on the IRS rather than the
> taxpayer to figure the correct EIC and do the right thing. (My
> guess is that the tax software the IRS uses to figure this would
> count this as earned income just like all the other tax programs
> do and the taxpayer would get the EIC credit without anyone giving
> it a second thought.) That way, if the taxpayer is ever audited
> and higher-ups say, on no, that is not allowed, the taxpayer can
> say, "I didn't do it -you did".
Another good idea, but perhaps not foolproof. I met someone years ago
who was in the army out of the country when he had to file his tax
return. He said that he did the best he could, then checked the box to
have the IRS figure the amount of his taxes, which they did. But then
they came back to him a year or two later, saying they made a mistake,
and wanted interest and penalties!
Stu
Ernie Klein
Stuart Bronstein <spam...@lexregia.com> wrote:
> Ernie Klein <eck...@pacbell.net> wrote:
>
> > Third party sick pay is paid by an insurance company whose
> > premiums are paid as an employment benefit by the employer or in
> > the case of the taxpayer I am talking about, by the employees
> > union as a union benefit.
>
> Good point. I hadn't considered that.
>
> > Perhaps the best way to handle this is not to apply for the EIC at
> > all but simply ask the IRS to figure the EIC by paper filing and
> > writing "EIC" on the dotted line next to line 66a per the 1040
> > instructions. That would put the onus on the IRS rather than the
> > taxpayer to figure the correct EIC and do the right thing. (My
> > guess is that the tax software the IRS uses to figure this would
> > count this as earned income just like all the other tax programs
> > do and the taxpayer would get the EIC credit without anyone giving
> > it a second thought.) That way, if the taxpayer is ever audited
> > and higher-ups say, on no, that is not allowed, the taxpayer can
> > say, "I didn't do it -you did".
>
> Another good idea, but perhaps not foolproof. I met someone years ago
> who was in the army out of the country when he had to file his tax
> return. He said that he did the best he could, then checked the box to
> have the IRS figure the amount of his taxes, which they did. But then
> they came back to him a year or two later, saying they made a mistake,
> and wanted interest and penalties!
Today I received a reply from the IRS that should answer my question.
Quote
[from] Tax...@hal1.ausc.irs.gov
Thank you for your inquiry of 03/31/2008. We apologize for any
inconvenience caused by the delay in our response.
Third party sick pay paid by agents of the employer are treated as
supplemental wage income (see Treasury Regulation 31.3402(g)).
Supplemental wage payments are considered to be earned income for
purposes of the Earned Income Tax Credit (see Internal Revenue Code
Section 32(c)(2)(A)(i)).
I hope this answers your question. If you need additional assistance,
please call us at 1-800-829-1040 between the hours of 7 AM and 10 PM,
Monday through Friday. Any forms or publications may be obtained on our
web site, www.irs.gov or by calling 1-800-829-3676.
I hope this answers your question. If you need additional assistance,
please call us at 1-800-829-1040 between the hours of 7 AM and 10 PM,
Monday through Friday. Any forms or publications may be obtained on our
web site, www.irs.gov or by calling 1-800-829-3676.
Sincerely,
R. Taylor
Tax Law Specialist
ID#84-01165
end quote
--
-Ernie-
Stuart Bronstein
> Today I received a reply from the IRS that should answer my
> question.
>
> Quote
>
> [from] Tax...@hal1.ausc.irs.gov
>
> Third party sick pay paid by agents of the employer are treated as
> supplemental wage income (see Treasury Regulation 31.3402(g)).
> Supplemental wage payments are considered to be earned income for
> purposes of the Earned Income Tax Credit (see Internal Revenue
> Code Section 32(c)(2)(A)(i)).
>
> Sincerely,
> R. Taylor
> Tax Law Specialist
> ID#84-01165
Congratulations. I don't know how a court would react to that, but I
think you're on pretty solid ground with that in writing.
Stu
removep...@yahoo.com
> Another good idea, but perhaps not foolproof. I met someone years ago
> who was in the army out of the country when he had to file his tax
> return. He said that he did the best he could, then checked the box to
> have the IRS figure the amount of his taxes, which they did. But then
> they came back to him a year or two later, saying they made a mistake,
> and wanted interest and penalties!
To make matters worse, if the IRS computes the return, the statute of
limitations never ends. What is the penalty for filing an incorrect
EIC, a fraudulent EIC? I know that if your file a false EIC then you
are disbarred from the EIC credit for 10 years. Does the penalty
apply when the IRS computes it -- seems it should not unless you give
them misleading information. I think if you disclose that you want
them to compute the EIC but attach a letter to your return saying that
you are not sure if the the piece of income qualifies for the EIC,
then there certainly should be no penalties and interest, but one
never knows when dealing with governments.