It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss, you won’t want to miss a single letter.

U is for Unused Sick Leave.

If you have paid sick leave at your company, you’re in the minority: There are no federal legal requirements for paid sick leave. However, some workers – those at companies subject to the Family and Medical Leave Act (FMLA) – are entitled to unpaid sick leave.

Typically, paid sick leave is taxable as regular income and is subject to withholding. In most cases, if you receive sick pay from your employer on an “as you get sick” basis, your sick pay isn’t distinguishable from your regular wages and is subject to withholding at your normal rate. If you receive sick pay from a third party who isn’t your employer nor acting as an agent of your employer, taxes are withheld only if you choose to have them withheld.

But what happens if you have unused sick leave that you can cash out when you retire? If that happens, you must include income those payments in gross income: They are taxable. That’s true even if you don’t get a check for that amount and instead you opt to have the value of unused sick leave applied to the cost of your continuing participation in a healthcare plan. That’s because the Internal Revenue Service (IRS) treats it as if you received a check and then turned around and paid for your healthcare. The plus side? In that event, you can include the costs of those health care premiums as a medical expense.

If, however, you participate in a health plan where your employer automatically applies the value of unused sick leave to the cost of your healthcare, there’s a different result. If you don’t have the option to take the cash, you don’t need to include the value in gross income since it’s not taxable. But that also means that you can’t include the costs of those premiums as a medical expense.

If you’re not sure what your sick leave options might be, ask your human resources (HR) representative.

For your taxes from A to Z, here’s the rest of the series:

Last Updated on


Kelly Erb is a tax attorney and tax writer.

Write A Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.