Does Utah require state income tax withholding from sick pay benefits when federal withholding is voluntary versus mandatory?

Plain-English summary

A company that administers sick pay benefits under employer group long-term/short-term disability plans asked the Commission how Utah's state income tax withholding rules interact with the IRS's federal withholding rules for sick pay. Under federal law, third-party sick pay is subject to voluntary federal withholding (via Form W-4S) unless it counts as "supplemental wages" under 26 CFR 31.3402(g)-1, in which case federal withholding is mandatory. The company asked three parallel questions about Utah's position, and the Commission answered each by tying Utah's rule directly to the federal one:

Question 1: If an individual voluntarily elects federal withholding, must Utah withhold state tax too?
No. Third-party sick pay paid by someone other than the employer isn't considered a federal "wage," so it isn't subject to mandatory federal withholding -- and since Utah's mandatory withholding rule (Utah Code Ann. §§ 59-10-401(3), -402) is itself based on the federal definition of "wages," it isn't mandatory under Utah law either, regardless of the individual's voluntary federal election. That said, the Commission recommended, for consistency, that employers withhold Utah state tax whenever federal tax is voluntarily withheld -- a practical suggestion, not a legal requirement.

Question 2: If an individual does NOT elect voluntary federal withholding, can Utah state tax still be withheld voluntarily?
Yes. No Utah statute or rule forbids voluntary state withholding in this situation, so it's permitted even though the individual declined federal withholding.

Question 3: If federal withholding is mandatory, must Utah state withholding be mandatory too?
Yes. Under Utah Admin. Code R865-9I-14(E)(1), withholding is required on all wages subject to federal withholding. Sick pay paid directly by the employer (or the employer's agent) counts as wages subject to mandatory federal withholding -- and when that's the case, Utah's mandatory withholding requirement follows automatically.

What this means for you

Third-party sick pay administrators and insurers

Utah's withholding obligation on sick pay isn't a separate, independent test -- it rides directly on the federal wage/withholding classification. If a payment isn't a federal "wage" subject to mandatory withholding, Utah won't mandate withholding on it either, though you can still voluntarily withhold Utah tax as a courtesy or consistency practice.

Employers offering group disability/sick pay plans

Whether sick pay is paid directly by you (making it a federal wage subject to mandatory withholding, and therefore mandatory in Utah too) or by a separate third-party insurer (voluntary federal withholding, and therefore voluntary in Utah too) changes your withholding obligations. Know which category your plan falls into.

Accountants and payroll professionals

This ruling is a clean example of Utah deliberately piggybacking its withholding trigger on the federal wage definition rather than creating an independent state test -- useful whenever a federal withholding classification question has a parallel Utah question.

Common questions

Q: If an employee voluntarily elects federal withholding on sick pay, does Utah automatically withhold state tax too?
A: No, not automatically -- Utah doesn't require it in that situation, though the Commission recommends doing it anyway for consistency.

Q: Can Utah state tax be withheld from sick pay even if the employee didn't elect voluntary federal withholding?
A: Yes, voluntary Utah withholding is allowed regardless of the employee's federal election.

Q: When does Utah require mandatory withholding on sick pay?
A: When the sick pay counts as a federal "wage" subject to mandatory federal withholding -- typically when paid directly by the employer or the employer's agent rather than by an independent third party.

Q: Does this ruling apply to my company's sick pay plan?
A: No. It binds the Commission only for the requesting company and the facts described. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes and rules:

• §§ 59-10-401(3), 59-10-402 (mandatory withholding tied to the federal wage definition)
• Utah Admin. Code R865-9I-14(E)(1) (withholding required on wages subject to federal withholding)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/98-045.htm

Original ruling text

98-045

Response July 1, 1998

98-045

June
5, 1998

Re:
State Income Tax Withholding From Sick Pay

Dear
Ms. Reese:

The
purpose of this letter is to obtain information on the State of Utah's position
regarding withholding of state income tax from sick pay benefits. COMPANY A provides sick pay benefits to
eligible individuals who are covered under an employer's long term and/or short
term group disability insurance plan(s).
The sick pay benefits are considered taxable under the Internal Revenue
Code to the extent the group insurance premium is paid by: 1.) The employer; 2.) By employees with pretax dollars under a Section 125 Cafeteria
Plan. [The 1998 Internal Revenue Service Publication 15-A addresses sick pay
matters in section 7, Sick Pay Reporting.]

With
third party sick pay benefits, the Internal Revenue Service maintains a voluntary
federal income tax withholding policy.
If the individual wishes to have federal income tax withheld from the
sick pay, the individual must submit a completed Form W-4S.

However,
the Internal Revenue Service requires mandatory federal withholding when the
type of sick pay issued comes under CFR 31.340 (g)-1, i.e. "Supplemental
wages". If the individual does not
submit a completed From W-4, the withholding rate is 28 percent.

Presented
above is information on sick pay benefits and the Internal Revenue Service's
position on when federal income tax needs to be withheld. So our company has a clear understanding of
the State of Utah's position on state income tax withholding from sick pay, you
are being asked to respond to the questions listed below:

If the individual on claim asks to
have federal income tax withheld on a voluntary basis, does the State of Utah
require state income tax to be withheld?

If the individual on
claim does not ask to have voluntary federal income tax withheld, does the
State of Utah allow state income tax to be withheld on a voluntary basis?

If mandatory federal income tax must
be withheld, does the State of Utah require mandatory state income tax be withheld?

For each of the questions listed above,
please provide in writing the statutory and/or regulatory authority upon which
the State of Utah bases its position on the withholding matter. If a regulatory authority is the basis for
position on the withholding issue, please provide a copy of that regulatory
authority for documentation purposes.

To
assist you with the tracing of this reporting inquiry, COMPANY A's state
withholding number is provided. The
number is #####.

Receiving
your written response by June 30, 1998 would be greatly appreciated. Please send your written response to the
address listed below:

NAME

ADDRESS

CITY,
STATE ZIP

If
you have questions about the contents of this letter, please contact me.

Sincerely,

NAME

July
1, 1998

NAME

ADDRESS

CITY,
STATE ZIP

RE: Advisory Opinion - Withholding Utah State
Income Tax on Sick Pay Benefits

Dear
NAME,

We have received your request for an
advisory opinion concerning the withholding of Utah state income tax from sick
pay benefits. You have identified that,
for federal tax purposes, sick pay benefits may be subject to mandatory
withholding or voluntary withholding, depending upon the party paying the
benefit. We agree with your assessment
of the federal regulations. You have
specifically asked three questions concerning Utah�s requirements when the
federal withholding is mandatory or voluntary.
For each question, we find as follows.

Question #1. If the individual on claim asks to have
federal income tax withheld on a voluntary basis, does the State of Utah
require state income tax to be withheld?

No.
If the sick pay benefit is paid to an employee by a third party, the
benefit is not considered a �wage� under federal guidelines. Thus, it is not subject to mandatory
withholding of federal income taxes.
Mandatory withholding of Utah state income taxes is based on the federal
definition of �wages;� consequently, the third-party sick pay benefit is not
considered a wage nor subject to mandatory withholding under Utah law
either. Utah Code Ann. ��59-10-401(3),
-402 (copy enclosed). Nor is there at present any Utah statute or
administrative rule that mandates the withholding of Utah state income taxes
when the federal tax is voluntarily withheld.
However, for purposes of consistency, we recommend that Utah state
income taxes be withheld whenever the federal income taxes are voluntarily
withheld.

Question #2. If the individual on claim does not ask to
have voluntary federal income tax withheld, does the State of Utah allow state
income tax to be withheld on a voluntary basis?

Yes. Again, there is no Utah
statutory authority that forbids withholding in this circumstance. Even if the taxpayer chooses not to have the
federal income tax withheld, the Utah state income tax can be withheld on a
voluntary basis.

Question #3. If mandatory federal income tax must be
withheld, does the State of Utah require mandatory state income tax be withheld?

Yes. Utah Admin. Code R865-9I-14(E)(1) (copy enclosed) states that
withholding is required for all wages that are subject to withholding for
federal tax purposes. Sick pay benefits
paid directly to the employee by the employer or the employer�s agent are
considered wages and are subject to mandatory federal withholding. Subject to the rule, when the federal income
tax is mandatorily withheld, then the Utah state income tax is mandatorily
withheld, too.

Please contact us if you have any
other questions.

For
the Commission,

Joe
B. Pacheco

Commissioner

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