It depends on whether you paid for the cost of the policy or your employer paid for the policy.
If you paid for the policy:
Your third-party sick pay isn't taxable. You might still receive a W-2, but you don't need to report the W-2 as long as all of the following apply:
- Box 1 – Wages is $0 or blank
- Box 12 has Code J
- Box 13 – Nontaxable sick pay is checked
If you receive a W-2 like the above, don't include it in your return. If you try to e-file and include this W-2, the IRS will reject your return
If your employer paid for the policy:
Your third-party sick pay is taxable. You'll receive a W-2 with taxable wages in box 1 and include this W-2 in your return.
