Short-term disability (STD) insurance provides financial assistance to those who are temporarily unable to work due to an illness, injury, medical condition, or even childbirth. These payments can greatly benefit workers who must miss work for a while.
Private insurance companies provide short-term disability insurance, which should not be confused with Social Security disability benefits. Many people who receive these short-term disability benefits wonder whether their payments are taxable.
The answer depends on a few different factors, so keep reading to learn whether or not your disability payments will be taxed.
What Is Disability Insurance?
Disability insurance provides benefit payments to people who are unable to work due to disabilities.
There are many different types of disability insurance, and we will discuss those in more detail later in this article. However, here are some of the basics. Disability insurance requires the payment of a monthly premium, although your employer might cover these premiums for you.
If you or your employer continue to make the premium payments, you will remain enrolled in disability coverage. Short-term disability insurance and long-term disability insurance are the two main types of coverage you will see.
Each insurance company gets to set rules about what qualifies as a disability. In most cases, the condition does not need to be occupational. You might miss work due to an extended illness or even the birth of a child.
Both conditions could qualify as short-term disabilities and allow you to receive payments while you are out of work. The disability income you receive is typically a percentage of your regular salary, anywhere from 40% to 100%.
In rare instances, it can replace 100% of your normal income; in all cases, it can be a huge help for your household.
Is Short-Term Disability Insurance Taxable?
Whether or not your short-term disability payments are considered taxable income depends on a few different factors.
- First, the answer depends on who makes your premium payments. If your employer makes your premium payment each month, then your benefits will be considered taxable income.
When income tax time rolls around, you will need to include the amount of the payments on your tax return.
However, if you make the premium payments, then your benefits might not be taxable. You will need to move on to the second test to determine whether the benefits will be taxable.
If you pay your own premiums each month, then whether or not your benefits are taxable depends on how you make your payments.
- If you make your premium payments with post-tax dollars, then your benefits will not be taxable.
- If you pay your insurance premium with pre-tax dollars, then your disability insurance benefit payments will be taxable.
The amount of these tax payments will depend on your overall income for the year and your specific tax bracket.
KEY TAKEAWAYS
- As a general guideline, short and long-term disability benefits will be taxable if premiums are paid by an employer or by an individual on a pre-tax basis.
- You may owe state taxes on your short-term disability benefits; each state handles tax on disability payments differently, so you should check with your local tax professionals.
- Disability payments are generally considered “sick pay” and, if taxable, are included as part of regular income.
How & When Disability Payments Are Taxed
Now that you know the general rules regarding taxing disability benefits, let’s take a closer look at how those payments are taxed.
We will start with the IRS treatment of these benefits. As mentioned, if your employer makes your premium payments or you make your premium payments with pre-tax dollars, you will owe federal income tax on all your disability payments.
These payments are typically considered sick pay, and they will be included as part of your regular income on your federal tax return.
In many cases, this income is included on your W-2. Federal taxes are generally not withheld from these payments so that you might find yourself with a big tax bill at the end of the tax year. For this reason, many people choose to complete a Form W-4S to have their insurance company withhold federal taxes from these payments.
You might owe federal taxes on these amounts and state income taxes on your disability payments.
Some states, like California, New Jersey, and Rhode Island, don’t tax short-term disability benefits. Other states, like New York and Hawaii, impose a state income tax on your disability payments.
If you are unsure of how your payments should be treated for tax purposes, you should consult a local tax professional. It would be quite a shock to think you are getting those benefit payments tax-free, only to find out later that you owe taxes on the entire amount of your benefits.
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- You may be interested in how long-term disability insurance works.
- Learn if Social Security Disability Insurance (SSDI) is taxable.
Types Of Disability Insurance
Short-term disability insurance is only one type of disability insurance you might purchase. Many other types are available, and we will cover some of those here. While this list is not exhaustive, it will provide an introduction to some of the most common types of disability insurance that you might encounter.
Short-Term Disability Insurance
This one should be fairly obvious. Since the goal of disability insurance is to act as a safety net and replace your income if you cannot work, then the higher your salary, the more an insurance company might have to pay you. Therefore, the higher your salary, the higher your premiums will be each month.
Long-Term Disability Insurance
Long-term disability benefits are similar to short-term benefits, with a couple of important differences. First, the waiting period for long-term benefits is usually longer. Waiting periods of 90 to 180 days are common for long-term benefits. Next, long-term benefits will last much longer. These benefits will often last for 12 to 24 months. In many cases, people will switch from short-term benefits to long-term benefits if they are unable to return to work.
Social Security Disability Insurance
These are disability benefits that are administered by the Social Security Administration. Your eligibility to receive these benefits depends on your work history and whether you have paid into the SSDI program.
There is a five-month waiting period for SSDI benefits, although there is no time limit. You can continue to receive these benefits as long as you are disabled. Even if you are self-employed, you can still receive SSDI if you have properly paid your Social Security taxes each year.
Workers’ Compensation
Workers’ compensation is a type of insurance coverage that provides financial assistance to those who are injured on the job and are unable to work. This type of insurance will pay your medical expenses associated with the injury, and it will also provide payments to help replace part of your wages while you are unable to work.
Certain employers are required to provide this coverage to their employees, so you are automatically covered in that case. If you are injured on the job, you should immediately contact your employer’s HR department so that you can follow the process to receive your benefits.
State Disability Insurance
Some states maintain their own disability insurance systems. In these states, you pay your premiums through payroll deductions. Instead of having a policy that is administered by a private insurance company, the state disability program administers the coverage. The policies work much the same way as other disability policies. Most states that provide these programs have both short-term and long-term benefits.
Long-Term Care Insurance
Long-term care insurance is a type of insurance plan that will cover expenses associated with long-term care in a nursing home or other facility. These facilities can be extremely expensive, and many insurance plans (like Medicare) do not provide benefits for long-term care.
If you have a disability and require this care, a long-term care plan can provide a huge financial benefit for you and your family. This type of policy can help cover these expenses without the need to use your retirement plan to pay for them.
TIP
Federal taxes are generally NOT withheld from disability payments; however, if you know these payments will be treated as taxable income, you can complete a Form W-4S to have the insurance company withhold taxes.
Is Disability Insurance Tax Deductible?
Generally, disability insurance is not tax-deductible, and the premiums you pay each month are not deductible on your tax return.
The benefit payments you receive from the policy are also not deductible. However, qualified medical expenses are tax-deductible.
This means that you can deduct some of your medical expenses from your taxable income. Deducting these expenses can help offset some of the income tax you might owe on your benefit amounts.
The Bottom Line
A short-term disability insurance plan helps provide you with some income while you cannot work. Depending on how the premiums are paid, the benefits provided by your disability insurance policy may or may not be taxable.
Even if your benefits are not taxed by the IRS, they might still be taxed by your state.
If you have any questions about the tax reporting of disability payments, you should always consult a tax professional in your area to assist you.
Frequently Asked Questions
Absolutely! Both types of insurance are meant to cover different things, and you should not select one in lieu of the other.
If you only choose short-term disability, then you may be left scrambling should you experience an injury or illness lasting longer than six months.
On the contrary, selecting only long-term disability insurance is not a good idea either. Most of those policies have a waiting period of about 6 months, so you would be without income for quite a long time before any benefits would begin.
Having both types of coverage should keep you protected regardless of the type of injury you might suffer. Many times, they even work in tandem with each other. You might start out receiving short-term disability benefits and then transition over to your long-term benefits if the illness continues for a longer period of time.
Short-term disability is reported to the IRS on your regular Form 1040. These benefit payments are considered sick pay and included as part of your regular income for tax purposes.
You will be taxed at your normal tax rate if you owe taxes on these benefits. Your annual income will determine your tax rate based on which tax bracket you fall into.
Remember that income taxes are often not withheld from these benefit payments unless you complete a Form-W4S and return it to your insurance company.
Yes, in most cases, you have to report disability income on your tax return.
In many cases, these payments are considered taxable income, and you must report the payments on your federal and state income tax returns.
If you paid your own premiums using post-tax dollars, your benefits will not be taxable, and you do not need to report them on your return.
Whether or not the payments count as income depends on how you paid the premiums.
- If your employer paid your premiums or you paid them with pre-tax dollars, then the benefit payments will be counted as income.
- If you paid your premium with post-tax dollars, your benefit payments will not be counted as income.
Remember that this is not considered legal advice, and you should always consult a tax professional if you have any questions about the taxability of your payments.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
