Is my short-term disability insurance benefit payment taxable? Will I get a 1099 or W2 statement that increases my taxable income?
The answer depends on how you paid for the coverage.
You can pay the IRS when funding the premiums (after-tax dollars) that you know you must make or after receiving benefit payments (pre-tax dollars or employer-paid), which happens only in rare circumstances (Illness or Injury).
Therefore, take out a recent copy of your pay stub and compare the deductions to the cost of coverage. Your answer is in these tiny details.
When You Pay Taxes
The benefit payments for short-term disability insurance obtained through private or public channels (see state below) could be income taxable depending on how you pay the premiums.
- Employee-paid
- After-tax dollars: not taxable
- Before-tax dollars: taxable
- Employer-paid: taxable
Complete Form W-4S (Request for Federal Income Tax Withholding from Sick Pay) and avoid having to write a big check to the IRS on April 15.
Maternity Leave
Discussing whether short-term disability for maternity leave is income-taxable provides a terrific forum to illustrate a simple cost-to-benefit analysis.
Policies covering maternity leave pay benefits for a planned event: mom’s recovery from normal labor and delivery. Plus, the policy could pay extra benefits for unexpected events such as medical complications of pregnancy before birth and postpartum disorders that delay a return to work.
In other words, the benefit payments often exceed the annual premium costs by a wide margin. Would you rather pay taxes in smaller or larger amounts?
Therefore, after-tax dollars should fund the premiums when buying a policy to cover maternity leave.
Individual Plans
Individual short-term disability payments are always tax-free. The insurance company will never send you a 1099 statement or withhold money from your check because the owner cannot use employer-paid or pre-tax dollars.
As an individual, you do not payroll deduct policies purchased outside your employer. You pay the premiums using after-tax money.
You cannot deduct the premiums as a medical expense on Schedule A. IRS Publication 502 explicitly excludes insurance that “provides payments for loss of earnings.”
Voluntary Plans
Voluntary short-term disability benefits are sometimes income taxable because employees can pay the premiums with before or after-tax dollars.
Voluntary short-term disability is available at work. If you pre-tax the premium, the insurance company may withhold money from your claim check and send a 1099 statement. You will have to report this income on line 21 of Form 1040.
Group Plans
Group short-term disability payments are always income taxable because the employer pays the premiums for the employees. However, they do not always fund 100% of the cost, meaning that a portion of the benefit could be tax-free.
Employers often fund a base-level benefit for all employees to achieve 100% group participation, allowing the insurance company to guarantee-issue coverage regardless of pre-existing health conditions.
Employees then can “buy up” the coverage (boost the monthly amount). Any extra benefit paid with after-tax dollars would not be subject to taxation.
Taxation of State Disability
State short-term disability payments are sometimes income-taxable. However, only seven have a mandatory program, each adopting a unique way to fund premium payments.
California
California State Disability Insurance (SDI) payments are federal income taxable, and you might also receive benefits from other programs.
- Unemployment Compensation
- Paid Family Leave
The state will mail you a 1099G report showing the total taxable income issued in the previous calendar year and send a copy to the IRS. However, you do not owe California state income taxes.
Hawaii
Hawaii Temporary Disability Insurance benefits are sometimes income taxable. The state requires employers to purchase coverage but allows them to deduct premiums from employees’ paychecks.
Therefore, the insurer chosen by your Hawaiian employer could send you a 1099 statement reflecting the proportion of your payment subject to taxation based on the premium funding.
- Employer-paid
- Employee pre-tax
- Employee after-tax
Massachusetts
You may have to pay taxes on Massachusetts short-term disability payments. The answer is unclear in this case because the state has different requirements for how employers can fund medical leave premiums.
| Under 25 Employees | 25 or More Employees | |
|---|---|---|
| Employer-funded | 0% | 60% |
| Employee-funded | 100% | 40% |
For instance, Massachusetts workers at large employers would owe taxes on at least 60% of their benefits because their employer pays 60% of the premiums. The answer to the remaining 40% depends on whether their payroll deduction was pre or post-tax.
New Jersey
New Jersey Temporary Disability Insurance (TDI) benefits are IRS income taxable. The Garden State adds FICA withholding and contributions (15.3%) to your total reportable wages.
Employers must send a separate W2 statement to affected employees each year. The benefits are not subject to New Jersey state income taxes.
New York
New York State short-term disability benefits are subject to income and FICA taxation. Once again, the amount owed depends on how your employer decides to fund the premium.
New York allows but does not require your employer to take a contribution from employees to offset the cost of providing disability benefits. Your payroll deduction could be pre or post-tax, affecting the claim payments subject to federal income tax.
Rhode Island
Rhode Island Temporary Disability Insurance (TDI) payments are not subject to federal or state income taxes, and recipients will not get a 1009G in the mail in January.
However, the RI Temporary Caregivers Insurance benefits are taxed at the federal and state level and will be reported to the IRS.
Washington
The taxability of short-term disability in Washington State also becomes gray because of the different ways employers can fund premiums for the Paid Family Leave program.
Premiums paid by employers and employees fund the Paid Family Leave program, which covers income losses caused by temporary disabilities.
| Under 50 Employees | 50 or More Employees | |
|---|---|---|
| Employer-funded | 0% | 27% |
| Employee-funded | 100% | 63% |
For instance, Washington State workers at large employers would owe taxes on at least 27% of their benefits because their employer pays 27% of the premiums. The answer to the remaining 63% depends on whether their payroll deduction was pre or post-tax.
