Disability insurance is protection against the financial burden of losing your income if you become disabled and can't work. Benefits are paid monthly, usually at about 60% of the income you were earning before you became disabled.
Disability benefits from a long-term disability insurance policy you buy on your own are not taxed, and the benefit payments you receive help you recover most of your income. However, disability benefits are subject to tax if your premiums are paid by an employer or from your paycheck before it has been taxed.
Is long-term disability insurance taxable?
Disability insurance benefits are paid out tax-free as long as you bought the policy with after-tax dollars. This prevents you from being taxed twice. While disability insurance benefits are meant to replace income, they are not classified as income for tax-reporting purposes.
Social Security disability insurance benefits are taxable as income — but only if you make over a certain amount of money.
Since Social Security disability is difficult to qualify for, most people benefit from getting their own long-term policy. A licensed agent at Policygenius can help you find affordable disability coverage to protect your income.
Is short-term disability insurance taxable?
Most people get short-term disability insurance through their employer (which is called group disability insurance). If the employer pays for all or part of the insurance premium, you'll have to pay taxes on the benefits. If you pay for your policy with pre-tax dollars, usually directly taken out of your paycheck, then you'll also have to pay taxes on any disability benefits you receive.
Employee-sponsored disability insurance benefits are considered a form of income, and will be taxed according to the federal income tax rates. The percentage of the benefit that is taxable is equivalent to the percentage your employer paid for in premiums, and any percentage of the premiums you paid with pre-tax dollars. (The portion you paid for with post-tax dollars is still tax-free.)
Short-term disability benefits don’t last as long as long-term disability payments, which provides the most income protection.
→ Learn about how long disability insurance lasts
How to file taxes on disability insurance benefits
You do not have to pay taxes on disability benefits you receive if you purchased your insurance policy with after-tax dollars. But people who get coverage through their employer may have to pay taxes on their disability benefit.
Taxable disability insurance benefits are classified as "sick pay," so if you anticipate receiving benefits, you have to submit IRS Form W-4S, titled "Request for Federal Income Tax Withholding From Sick Pay" to the disability insurance company. You can also make estimated tax payments using Form 1040-ES, "Estimated Tax for Individuals," which you'll file directly to the IRS.
If you start receiving taxable benefits, you need to include the amount of benefits you receive on your tax return as part of your salary or wages when you file. (That's the "Wages, salaries, tips, etc." line on Form 1040, 1040A, and 1040EZ.)
As with reporting traditional wages and salaries, if the amount you paid in estimated tax (as reported on the 1040-ES) or via income tax withholding (as reported on the W-4S) is higher than what you actually owe, you'll receive a refund. If you paid too little tax, you'll have to pay more to make up the difference on Tax Day.
The IRS will let you deduct qualified out-of-pocket medical expenses if you're eligible to itemize your deductions. That means when you use your disability benefits for medical care, those expenses may help negate the taxes.
On the other hand, disability insurance premiums are not deductible from your taxes.
Frequently asked questions
Do you pay taxes on disability insurance?
Most people don’t have to pay taxes on long-term disability insurance benefits, because they buy the policy with their own money out-of-pocket, after it’s been taxed.
Is short-term disability taxed?
Short-term disability benefits are usually taxable, since you usually get this kind of disability coverage from an employer who pays for some or all of the policy. You’ll have to report the benefit payments as income on your tax return.
Do you have to file taxes on disability income?
Supplemental Security Income (SSI) is never taxed or counted as income, while Social Security disability insurance benefits (SSDI) are taxable if you make over a certain amount of income.