Are Short-Term Disability Payments Taxable Income?

by Rod Howell

    Short-term disability benefits may be taxed as regular income.

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    According to the Department of Labor, more than 28 million people 16 and older had a disability in 2013. Short-term disabilities can keep employees out of work for a couple of days up to several months without pay. To protect themselves financially, workers can obtain short-term disability coverage from private and public sources. They get benefits for temporary periods while recovering. Their disability benefits may be taxable as regular income, depending on how the insurance premiums are paid.

    Private Short-Term Disability

    Workers can buy short-term disability plans privately through insurance companies. Premiums are paid with after-tax dollars, so disability benefits are received tax-free. Workers can also buy disability coverage from their employer if their company sponsors a short-term disability plan. Benefit payments from employer-sponsored plans are taxed if the employer pays the insurance costs or workers pay their premiums with pretax dollars. Benefits from workplace plans are not taxable if employees pay the premiums with after-tax dollars.

    State-Sponsored Temporary Disability

    State-sponsored disability plans cover short-term injuries and illnesses suffered by workers. As of 2013, five states sponsor such plans: California, New Jersey, New York, Rhode Island and Hawaii. These plans are funded by payroll taxes. Benefit amounts are determined by employee wages, and the length of benefits is generally several weeks up to one year. The taxation of benefits is determined by the state. For example, Rhode Island pays out tax-free benefits, while beneficiaries in New Jersey must pay federal income tax on their disability checks.

    Workers' Compensation

    Workers' compensation insurance covers temporary illnesses and injuries suffered on the job. This insurance program is state-regulated, and most employers are required to carry this coverage. A few states exempt employers from buying this insurance if they have less than three employers or are able to self-insure. Disabled workers can receive up to two-thirds of their pre-disability salary as tax-free benefits.

    Tax Reporting

    If workers paid short-term disability premiums with after-tax dollars, they can exclude the benefit amounts on their individual tax return. However, if they paid their employer-sponsored disability coverage with pretax dollars, the amount of their taxable disability benefits is included with their wages in box 1 of IRS Form W-2. This amount goes on line 7 of Form 1040 or 1040A.

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    About the Author

    Rod Howell is a writer living in Charlotte, N.C. He graduated from Thaddeus Stevens College with an associate degree in administration in 2000. He published the book "Capitol Conspiracy" and regularly contributes to a blog as well as various other websites, drawing frequently from his experience as an insurance agent.

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