Rev. Proc. 75-7

Section 1. Purpose

The purpose of this Revenue Procedure is to set forth the conditions under which sick and injury payments excludable from gross income under section 105(d) of the Internal Revenue Code of 1954 may be shown separately on Form W-2, Wage and Tax Statement, reporting wages paid after December 31, 1974, and to establish the requirements for a separate statement by the employee to support an exclusion of these payments from his income tax return.

Sec. 2. Background

.01 Section 31.3401(a)-1(b)(8)(ii)(b) of Employment Tax Regulations provides that withholding is not required with respect to any or all employees upon the amount of any wage continuation payment made to an employee directly by the employer for whom he performs services to the extent that such payment is excludable from the gross income of the employee under section 105(d) of the Internal Revenue Code of 1954, provided the employer maintains certain records specified in the regulations.

.02 In Revenue Procedure 56-17, 1956-1 C.B. 1042, conditions are set forth under which employers may show separately on Form W-2 the amount of any sick or injury payments excludable from gross income, under section 105(d) of the Code, which are made directly by them. That Revenue Procedure also provides that the fact that excludable sick pay may be reported separately on Form W-2 will not relieve the employee of the necessity of submitting a separate statement with his income tax return showing the computation of excludable sick pay.

.03 Rev. Proc. 73-19, 1973-2 C.B. 470, modified Rev. Proc. 56-17 by setting forth conditions under which Form W-2 could be attached by a taxpayer to his individual income tax return in support of an exclusion of sick pay, in lieu of the separate statement required by Rev. Proc. 56-17.

.04 The Service has found that employers have been entering amounts which are not supported by the records required by section 31.3401(a)-1(b)(8)(ii)(b) of the regulations. This has resulted in erroneous exclusions of income from individual returns.

Sec. 3. Procedure .01 Employers may show separately on Form W-2 the amount of any sick or injury payments excludable from gross income, under section 105(d) of the Code, which are made directly by them. However, in such cases, regardless of whether or not tax was withheld on such excludable amounts, employers must keep the records described by subdivisions (1) and (2) of section 31.3401(a)-1(b)(8)(ii)(b) of the regulations. If these excludable amounts are reported separately on Form W-2, the entry should be made and captioned, "Excludable Sick Pay." It should be clearly understood that, whether or not a separate entry is made of the amount excludable from gross income under section 105(d) of the Code, the employer must include this amount in the total wages reported on Form W-2.

.02 The fact that "Excludable Sick Pay" (or a similar entry) may be reported by the employer separately on Form W-2 will not relieve the employee of the necessity of submitting a statement with his individual income tax return showing the computation of "Excludable Sick Pay" and indicating the period or periods of absence, nature of illness or injury, and whether hospitalized.

Sec. 4. Effect on Other Documents

Rev. Proc. 56-17 is superseded and Rev. Proc. 73-19 is obsoleted.

Sec. 5. Effective Date

This Revenue Procedure is effective for taxable years commencing after December 31, 1974.