December 10, 2020

If you’re temporarily disabled with an injury, serious medical conditions, or a pregnancy, it is possible you could be covered by short-term disability payments that can be obtained through private insurers and also as part of your employer’s compensation for employees. Payments that you receive could potentially be taxable, it all depends on how and when they are paid. Here’s what you need to know.

Income exemptions

Typically, all income that is received is considered taxable unless it is expressly exempted. These types of exemptions will include worker’s compensation payments and certain compensation that was awarded for damages through litigation.

Short-term disability payments that are received under an insurance policy are not considered exempt and could lead you to be liable for additional taxes if you have already taken on the cost of taxation through the structure of the plan.

Employer disability benefits

If both you and your employer share the cost of a disability plan then you will only be liable for taxes on the amount received due to payments made by your employer. If a taxpayer pays the entire cost of a sickness or injury plan with after-tax money, they will not need to report any payments received under the plan as income.

If an employer only pays half the cost of premiums and does not deduct these payments from a taxpayer’s pay, then a taxpayer will most likely report half the payments received as income. Medical costs that have been paid for after the plan was established and have yet to be reimbursed are generally not taxable.

Cafeteria plans

This is an insurance program that allows employees to pick the coverage they would like to receive from a menu of options. This coverage is typically paid for by directing pre-tax dollars to the plan.

If the amount of the premiums is paid for by an employer or by you with before-tax dollars, then a taxpayer will most likely need to report any payments received as income. However, if the income used for the plan was paid for by a taxpayer with after-tax dollars, they are considered to have paid the premium and no payments under the plan will need to be reported.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.