Determining whether third party sick pay is taxable is dependent upon who is actually making the payments. If the payment comes from an agent of the employer, then the sick-pay is not taxable. Third party sick pay is taxable if payments come from someone other than the employer's agent.
While third-party sick pay is not taxable in some instances, the individual being paid may still opt to have taxes withheld from his pay. To do this, the individual would fill out a W4 form and submit it to the payee. Once requested, the payee must comply with his wishes to have taxes withheld.