If you are searching for “Is Short Term Disability Taxable?”, then you are at the right place. Insurance is very common these days. People tend to insure those things that are very dear to them, like their houses, cars, and so on. However, there is one thing that they do not take very seriously, which they must. This would be their ability to work and earn a living.
Life is unpredictable. You never know what is waiting for you. There is a chance that you’d lose your ability to work due to a disability, depending on its type. This is the reason why you should invest in disability insurance to make sure that you or your family won’t suffer during those days.
However, there is one big concern that people have when they look for disability insurance is the tax that comes with it. While long-term disabilities are still manageable, it is the short term disabilities that create more trouble when it comes to paying taxes. Therefore, it is very normal for you to ask, “Is short term disability taxable?”
Well, there is nothing to worry about as you are here at the right place. In this article, we shall unfold all the important details about the short term disability insurance, including its tax impositions, how you may get one, and when you need one.
So, without any further delay, let us get started.
- Short term disability benefits may replace a part of your income at a time when you are unable to work and earn an income due to a disability.
- These benefits are mostly a part of the compensation package that an employer offers. However, you may also buy your own policy.
- The taxation on short term disability insurance depends on who is paying for it. If your employer is paying the premiums for the insurance, there is a chance that they may be taxable.
What Is Disability Insurance?
In simple terms, it is a type of insurance that offers a part of income during a circumstance when an employee is not able to perform tasks due to a disability or an illness.
Disability insurance is of two types. They are namely:
Short term disability
In this type of insurance, the employee gets a portion of their income for a short time period. It may last from just a few months and go on up to two years.
Long term disability
In this type of disability insurance, the individual starts getting the payment after passing a long waiting period of many weeks or months which may last from just a few years till the age of retirement. Disability insurance may come from multiple sources. It may be your employer who provides the disability insurance, or you may just buy it yourself from an insurance company.
Is Short Term Disability Taxable?
According to the IRS, short term disability is a type of sick pay. This means it will only be considered taxable when the employer is paying for the premiums – both in part or in full. It will also be taxable if you are paying your own premiums with pre-tax dollars.
For instance, if the employer is deducting the premiums from the salary he pays to you and then using the balance to calculate the tax, you will have to pay tax on your short term disability insurance.
Here is the breakdown which could help you further understand:
- If the employer is paying 100% premiums, your entire short term disability income will be taxable.
- If your employer and you are dividing the premiums precisely by half, and if you are paying the premiums with post-tax dollars, then only half of it will be taxable.
- When you are paying all of the premiums with post-tax dollars, then none of the benefits you receive will be taxable.
“Your short-term disability benefits aren’t taxable if you receive them from a policy for which you personally paid all premiums, such as if you bought your own policy that’s not tied to your employer.”
How Is The Short Term Disability Taxed?
Let us imagine that you are collecting $9,000 in short term disability benefits for around six months. Your employer is paying half of the premium, and you are paying the rest through your pre-tax withholding from the paychecks.
You need to report the whole $9,000 as a table income on the Form 1040 tax return. You would then enter this amount on line 1 of the return, with the other salaries, wages, or tips you earned. The taxable amount must appear on the W-2 form you received from your employer, having details of all your taxable income.
“You can submit IRS Form W-4S, the “Request for Federal Income Tax Withholding From Sick Pay” form, to your insurance company to have taxes withheld from your benefits. This will prevent you from ending up with a big tax bill at filing time. You can also voluntarily send estimated tax payments to the IRS to cover any taxes that will ultimately be due.”
The exact amount that you need to pay in taxes on short-term disability depends on your total income.
How Do Different States Tax The Short Term Disability Benefits?
Taxation does not start and end with the respected federal government. There are just nine states that will not charge you with an income tax. They are namely:
- South Dakota
- New Hampshire
While Rhode Island, New Jersey, and California don’t impose tax on short-term disability. However, the IRS may impose a couple of wrinkles.
For instance, the IRS needs the employees in New Jersey to treat their short term disability benefits as third-party sick pay. This makes the short term disability taxable at a federal level as per the rules of the IRS. However, the same is not taxable under the state government. This would include the FICA taxes that the employer pays.
When speaking of California, the employees need to pay to the disability insurance program of the state through payroll deductions. However, the IRS will only tax these benefits when they’d be an accurate substitute for the insurance of unemployment. In this case, the employer has to send the employee a Form 1099-G, which reports the income. Otherwise, the short term disability benefits will not be taxable.
If you are unsure if short term disability is taxable in your state, check with the human resources department of your employer. Or maybe just a local tax professional.
The Bottom Line
I am hoping to have answered your question, “Is short term disability taxable?”
Now you know that there is no solid answer to the question. Rather, there are certain circumstances that will decide if you have to pay taxes for your short term disability. You must also understand how important it is for an individual to invest in short term disability insurance.
Talk to your employer to check if they don’t offer it. If not, make sure you buy one by yourself from an insurance company of your choice.