Set up third-party disability insurance or a private paid family and medical leave plan
Disability insurance pays an employee a portion of their compensation when they cannot work due to illness or injury. This includes situations like giving birth or a prolonged illness.
Paid Family Leave (PFL) and Paid Family and Medical Leave (PFML) are benefits that exist in several states. They give employees partial pay when they take time off for qualified family or medical reasons. How these programs work depends on your state. Some states require you to get coverage through a private insurance company. Other states may collect the premiums but let you use private insurance instead. This article is about PFL and PFML insurance from private companies only. For information on PFL and PFML run by your state, click here.
If you offer medical insurance through Gusto, you can set up new disability insurance through Gusto.
If you offer disability insurance or paid family and medical leave insurance through a private carrier outside of Gusto (a third party), use this article to record the insurance policy, employee deductions, employer contributions, and any payouts. We will deduct employees for their portion of the premiums and handle the associated tax reporting and filings for you.
Taxability
Company contributions are always pre-tax. Employee deductions can be either pre-tax or post-tax. Check out IRS Publication 15-A to learn more about the taxability of third-party disability insurance.
If you offer disability insurance through a third party, follow these steps to add it to Gusto:
Click Benefits.
Under Financial Health, select Disability/Leave.
Select Yes, we currently offer this benefit.
Click Next.
Name the benefit, select what type of insurance you have, enter the employee deduction and company contribution, and upload your plan document.
Click Save & Continue.
Select which employees are enrolled in this benefit.
If needed, customize the employee deductions and company contributions.
Click Save & Continue.
On the next payroll you run, enrolled employees' paystubs will display the employee deductions and company contributions you entered, if applicable. If an employee takes a leave of absence due to an injury or illness that qualifies them to submit a claim to the insurance carrier, follow the steps below to record any payouts. This makes sure Gusto taxes employees properly.
If an employee takes a leave of absence that qualifies them to receive payouts from your insurance carrier, you need to do three things in Gusto: record the dates of their leave, upload documentation of their payout, and email us from the Help 
section of your account.
Step 1: Record the dates of an employee's leave
Go to People.
Click the name of the employee.
Go to Benefits in their profile.
Under Disability, click Manage Leaves.
If you do not see this, make sure you've added the benefit to Gusto and the employee is enrolled in it.
Click Add Leave.
Fill out the details of the leave
Start date
A reason for the leave, for your records
End date (you can add this later if the end date is unknown)
Click Save.
Step 2: Report an employee's insurance payments during their leave
When your employee submits a claim and receives a payout, you'll receive a distribution report from the insurance company. This report describes the payments received and any taxes withheld. When you receive a distribution report, follow these steps to upload it to the employee's profile.
Go to People.
Click the name of the employee.
Go to Benefits in their profile.
Click Manage Leaves.
Next to the leave you're recording a payment for, click Edit.
If you do not see a leave listed for the correct date range, follow the steps below under "Record the dates of an employee's leave" to set it up.
Under Source, click Select File to upload the payment document from your insurance company.
Important: Check if the document says you need to include it on your payroll. If so, finish uploading the document, then contact us from the Help
section of your account so we can make sure it's captured on payroll and reports.
Click Save.
Step 3: Email Gusto
In Gusto, click the help icon to email us and let us know you uploaded the document. We'll review the payment amounts for you and make sure the employee is taxed properly.
Short-term disability and paid leave insurance are complex from a tax perspective. The insurer often manages employee taxes, while the company manages taxes like Social Security and Medicare. The specific taxation will vary based on your plan document and the insurer's requirements.
You may need to file additional forms depending on your plan:
If the sick pay will be reported on Forms W-2 under the name and Federal EIN of the insurer or agent, you must file Form 8922. Here is a link to the form instructions. Gusto does not currently support this form. If you need help, work with your tax advisor. If you do not have one, use our partner directory to locate one near you.
If the sick or leave pay will be reported on Forms W-2 under the name and Federal EIN of the employer, only the insurer/agent must file Form 8922. You do not need to file this form.