Notice that the referenced citation first begins with "Sick pay and sick leave are taxable compensation when representing your regular wages." and then goes on to explain "Payments, not representing regular wages, . . ." which seems to include that such non-wage substitution payments made either by the employer and/or a third-party, are not taxable by PA.

Did your employer include the third-party payments in your W-2's box 16?
Was PA income tax withheld from that entire value in Box 16?

Generally, third-party sick/short-term disability payments received in substitution for regular wages remain taxable by a state with an income tax.

It does not appear the employer included these wages in Box 16.  However, we received a separate W-2 from the insurance provider who paid the disability benefit, which were not regular wages, who reported the full amount paid by the insurance company in Box 16, but then no tax was withheld at that time.

Ah ha.  Your contention that the payments you received ". . . were not regular wages . . ." appears to be incorrect.  You received third-party income "in lieu of" your regular wages and which were therefore taxable by the state.  Since your employer did not include the amounts received in their W-2, and since the third-party issued a separate W-2, your payments are deemed to be "in lieu of" your regular wages and are therefore taxable by the state.  The fact that PA income tax withholding may (or may not) have been deducted on either your employer's, or the third-party's, W-2 doesn't matter.

That makes more sense, thank you for your input and insight.

You are most welcome.

Hello

I have a very similar situation regarding my disabled brother.  He is permanently disabled since early 2020 and has from that time received any compensation from his employer.  Employer paid for third party Disability Policy for which my brother is receiving monthly payments.   We included the third party disability payments in his Federal Return.  Third party insurer included this income on line 16 of the W2 they issued.  Your earlier response indicated that if it is received "in lieu of regular wages" it remains taxable for PA purposes.  Specifically, what does term "in lieu of regular wages" mean since the whole issue of taxable vs non-taxable in PA relies on this  phrase?   Secondly, under which circumstances would disability pay not be considered "in lieu of regular wages"?  Knowing this might help me understand the concept.

Thank you

@FEDRED -- "In lieu of wages" usually means that the recipient is still considered employed by the employer, and has not been retired or otherwise terminated.   Thus the disability payments are "in lieu of" or in place of his normal wages.  Disability payments received after the employee has retired or otherwise ended his employment would no longer be "in lieu of wages."

Thank you very much for your prompt reply.  Honestly. after trying to get an answer to this basic question for several months (including contacting the comptrollers office of PA) you are the only one to come forth with an answer.  My brother became disabled on 2-26-2020 and after one year, his employer terminated his employment on 3-26-2021 .  The third party insurer refused to change his W, now I know why.  I expect that  they will reclassify his sick/disability payments to non-taxable after 2-26-2021.  Unfortunately, they do not take calls/inquiries for me to confirm this.  Would you happen to know if there is a particular mechanism (a particular form, etc.) to notify them of this change in his employment status? 

I thank you again for your help on this. 

@FEDRED  wrote:  "Would you happen to know if there is a particular mechanism (a particular form, etc.) to notify them of this change in his employment status?"

I don't know, but I expect the insurance company does have such a form, but I would also expect that the form has to be submitted by the employer, not by the insured. 

If I look at this site: www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.aspx#:~:text=Payments%2C%20not%20representing%20regular%20wages,taxable%20income%20for%20Pennsylvania%20purposes.

in the third row it shows:

this does seem to indicate that they are NOT taxed by PA, in any case it would be good for TurboTax to review this so they have it correct either way.