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Is Short Term Disability Income Taxable? Is your short term disability insurance benefit taxable? Disability insurance replaces income and income is taxable - but only once. You will either pay taxes on the benefit or on the premium, but never both. Your method of payment is sometimes determined by you, and other times determined by a third party: your employer, or government entity. Know the rules, and the payoffs.
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Maximizing My Disability BenefitI was planning a pregnancy when I bought my short term maternity disability policy and knew my benefit might greatly exceed premium paid. Paying for coverage after tax helped keep my entire benefit when the need was greatest.
Disability Income Taxable: Employer ContributionsShort term disability income is taxable if your employer shares in the cost of your disability premium. Many group disability programs operate in this manner, and many employers elect to provide disability insurance as a paid company benefit. Make sure you understand if your employer is paying a portion of your premium. Your disability income will be taxable proportionately to the premium paid by your employer. Short Term Disability Taxable: Pre-Tax ElectionsShort term disability insurance is taxable when you pay for the premiums using pre-tax deductions. There are many tax savings benefits to pre-taxing insurance deductions. Since short term disability insurance pay benefits directly to you, you should understand the implications when you use the benefit.
If you pay the premium with pre-tax dollars, your benefit will be taxed. Also, your employer will need to fund their portion of FICA tax during your period of disability. The insurance carrier will send a 1099 notice to your employer. Disability Income Taxes: After Tax DeductionsIf you paid the premium entirely yourself using after-tax dollars, then your benefit will be tax free. This is a great way to replace more than 66% of your take home pay. Let's look at an example. Let's say you earn $54,000 per year. Your monthly gross would be $4,500 per month, and your take home pay would be about $3,000 per month. Short term disability benefits will replace up to 2/3 of your gross income - or $3,000 per month - equaling your take-home-pay. Many women planning a pregnancy opt for after tax payments in order to maximize maternity leave pay. When the odds are stacked in your favor, maximize your bet.
Are State Disability Benefits Taxable?Are state short term disability benefits taxable? Only five states have a disability program in place and the answer differs for each state as the manner in which premiums are paid differ. California state disability insurance benefits are not taxable unless your benefit is in place of unemployment insurance. The premium is 100% employee paid via after tax deductions. California SDI also funds the CA Paid Family Leave program which is considered unemployment insurance and thus is taxable. New Jersey temporary disability is funded by both employee and employer contributions. Therefore the benefit is taxable, but only in proportion to the contributions made by your employer. The taxable amount should appear on your W2 statement at the end of each tax year. NJ temporary disability benefits are not subject to New Jersey income taxes. New York state short term disability premiums are partially funded by employees and employers. Benefits are considered taxable in proportion to the employer and employee contributions. Rhode Island temporary disability benefits are not subject to federal or state income taxes. |
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