turbotax error: Form W-2 Box 3 must be entered

[lilylee]

I received a W-2 for my long term disability settlement with an insurance company. The premium was paid by the employer. Box 1 was filled with the settlement payment, but Box 3 and 5 were left blank. Box 13 "Third-party Sick Pay" was checked. Box 12 code was J with the payment amount. The final Smart  Check failed with the error: Form W-2 Box 3 must be entered. How do I fix this error? TIA

[DawnC]

The employer should issue you a corrected w-2.   Code J is non-taxable sick pay.   If this is long-term disability and the premiums were paid for by the employer, it is taxable, and the amounts should be in Box 1, 3, and 5.   

If the income is non-taxable, it does not need to be entered.   But if it is taxable, FICA tax (SS and Medicare) should be included.   

Is the long-term disability I am receiving considered taxable?  The answer is YES if the employer paid the premiums, which you indicated they did.   In this case, the income should be in Boxes 1, 3, and 5.  

You can report the taxable income without the w-2 by entering it in miscellaneous income.   

[lilylee]

Hi Dawn,

Thanks for the reply. I have a special case that my STD/LTD settlement was paid 4 years after my last day of work and 3 years after the termination of the employment. According to IRS publication 15-A (2024), Employer's Supplemental Tax Guide, section "Social Security, Medicare, and FUTA Taxes on Sick Pay", sick pay is not always subject to social security and Medicare taxes, and FUTA tax. They list several special cases as follows:

Amounts not subject to social security, Medicare, or FUTA tax. 

The following payments, whether made by the employer or a third party, aren't subject to social security, Medicare, or FUTA tax (different rules apply to federal income tax withholding).

• Payments after an employee's death or disability retirement. Social security, Medicare, and FUTA taxes don't apply to amounts paid under a definite plan or system, as defined under Sick Pay Plan, earlier in this section, on or after the termination of the employment relationship because of death or disability retirement. However, even if there is a definite plan or system, amounts paid to a former employee are subject to social security, Medicare, and FUTA taxes if they would have been paid even if the employment relationship hadn't terminated because of death or disability retirement. For example, a payment to a disabled former employee for unused vacation time would have been made whether or not the employee retired on disability. Therefore, the payment is wages and is subject to social security, Medicare, and FUTA taxes.

• Payments after 6 months absence from work. Social security, Medicare, and FUTA taxes don't apply to sick pay paid more than 6 calendar months after the last calendar month in which the employee worked.

My settlement met both of these special treatments. I called the insurance company's tax department and they confirmed they reported W-2 correctly. It seems to match the above IRS publication. I prefer not to change anything on W-2 form myself although blank and $0 might be the same regarding tax calculation. This error disappeared if I put $0 on box 3 and 5 instead of leaving them as blank. 

[lilylee]

Hi Dawn,

I'd like to clarify that I paid 50% STD/LTD premium post tax. The insurance company reported 50% of the settlement amount on Box 1, W-2 correctly. Is that why they put code J on Box 12 since the other 50% settlement non taxable?

Thanks again.

@DawnC 

[RobertB4444]

Yes, it appears that your settlement is non-taxable.  As such, if this is the only income that you have you are not required to file a tax return.

@lilylee 

[lilylee]

50% of the settlement is taxable because the employer paid 50% STD/LTD premium. The question is if this taxable settlement is subject to Social Security and Medicare taxes. I believe it's not according to the IRS publication. Turbo Tax doesn't accept the blank Box 3 and 5 as shown on W-2.

@RobertB4444 

[MonikaK1]

You had indicated that the error was resolved by entering a zero in boxes 3 and 5 instead of leaving them blank.

If the employer only listed the taxable half of the settlement on the W-2, then you can enter the rest as is.

If the entire settlement payment is included on the W-2 and you have information that only half of it is taxable, you could enter the full amount in the W-2 section and make a reversing entry for the nontaxable portion:

1. Go to Wages and Income
2. Scroll down to Less Common Income
3. Go to Miscellaneous Income
4. Select Other Reportable Income and follow the prompts. Enter a description such as "nontaxable portion of settlement" and enter the amount as a negative number (minus sign before the number).

[lilylee]

The insurance company only reported taxable half of the settlement on the W-2, Box 1. I already filed my tax return and changed Box 3, 5 blank to 0 to clear the error.