If you get sick pay from your employer, the taxes are simple. Sick pay is wages, so it shows up on your W-2 and you report it with the rest of your wages. Handling taxes on third-party sick pay -- benefits from your insurance company -- is trickier. Sometimes it's taxable, sometimes it isn't.
Breaking It Down
If you paid all the insurance premiums yourself, the third-party payments aren't taxable. That applies even if you bought the policy through your employer. All the sick pay is taxable if your employer paid the premiums. If you and your employer split the premiums, the taxability splits too. If you pay, say, 40 percent of the premiums, 60 percent of the sick pay is taxable. You report it with your other taxable income on your IRS Form 1040.
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Cafeteria plans give employees the option to spend pre-tax dollars on a menu of benefits, such as health insurance or adoption assistance. If you pick health insurance, the sick pay benefits are tax free if your employer includes the premiums as part of your income, because the IRS counts that as you paying the premiums. If the employer excludes the premiums from your income, you pay full tax on benefits, including sick leave, because you didn't pay the premium. You still don't pay for benefits that only reimburse medical bills.