You can certainly pay yourself as owner or a Key employee a sick pay if either one or both of you became disabled. However, please note that if you did pay the salary while disabled and without a simple Qualified Sick Pay Plan, the IRS and tax courts would rule that as a dividend NOT as sick pay and would levy a considerable amount of back taxes due with penalties.
Couldn’t happen to you? Let’s examine a specific Tax Case. In 1963, The Chism Ice Cream Company actually paid sick pay to a disabled employee for five years. The tax courts in an audit found there was no plan and noticed the absence of anything in writing. The tax courts decided that these payments were not “sick pay” and the exclusion for disability was disallowed. The result? The Chism Company had to pay a substantial amount of taxes plus penalties.
Could this have been avoided? Absolutely! And with only a two document Sick Pay Plan. It is called a Qualified Sick Pay Plan. There are only two pages, there is no charge to adopt this and you do not have to purchase a disability insurance policy. We recommend you do purchase an Insurance policy as it is for more cost effective to do so but it is surely not a requirement.
Next we’ll discuss in general the two documents and then examine the cost effectiveness of an Insured Plan against a plan with no Insurance.