Short-term disability coverage typically for up to a year. It usually pays a percentage of your salary, which can be based on the number of years you’ve worked for your company, the type of coverage you have, and the type of disability. Whether your short-term disability benefits are taxable, and what portion of them can be taxed, depends on whether and how you contribute to the premiums.
When Is Short-Term Disability Taxable?
The IRS considers short-term disability to be a type of sick pay. As such, it’s generally only considered to be taxable income if your employer paid the premiums in part or in full. It’s also taxable if you paid your own premiums (or a portion of them) with pre-tax dollars. For example, if your employer deducted your premiums from your pay and then used the balance to calculate tax withholding, your short-term disability would be taxable. Here’s how it breaks down:
If your employer paid 100% of your premiums, all of your short-term disability income is taxable.If you and your employer split the premiums exactly 50/50, and if you paid your portion of the premiums with after-tax dollars (not paycheck deductions), half of it would be taxed. If you paid all your premiums yourself with after-tax dollars, your benefits are not taxable.
How Is Short-Term Disability Taxed?
Let’s say you collect $9,000 in short-term disability benefits over six months. Your employer paid half the premiums, and you paid the other half through pre-tax withholding from your paychecks. You must report the entire $9,000 as taxable income on your Form 1040 tax return. You would enter this amount on line 1 of your return, along with all other wages, salaries, or tips you earned. The taxable amount should appear on the W-2 form you received from your employer detailing all your taxable income. Exactly how much you’ll pay in taxes on short-term disability income depends on your overall income from all sources. You’ll pay a percentage of the benefits equal to your top tax bracket when you add up your total income. Here are the tax brackets for a single individual in 2022: Finally, you’d pay 22% on the portion of your income over $41,775, which is the remaining $3,225 of your benefits.
How States Tax Short-Term Disability Benefits
Taxation doesn’t begin and end with the federal government. There are only nine states that don’t have an income tax:
AlaskaFloridaNevadaNew HampshireSouth DakotaTennesseeTexasWashingtonWyoming
New Jersey, California, and Rhode Island don’t tax short-term disability benefits, but the IRS imposes a few wrinkles. For example, the IRS requires that employers in New Jersey must treat short-term disability benefits as third-party sick pay. That makes short-term disability taxable at the federal level, according to IRS rules, even though the benefits aren’t taxable at the state level. This includes the FICA taxes (Social Security and Medicare) that are paid by the employer. As for California, employees are required to pay into the state’s disability insurance program through payroll deductions. But the IRS only taxes these benefits if they’re considered to be a substitute for unemployment insurance, in which case your employer should send you a Form 1099-G reporting the income. Otherwise, your short-term disability benefits aren’t taxable. If you’re not sure whether short-term disability is taxable in your state, check with your employer’s human resources department or a local tax professional.
