If you’re unable to work due to injury, illness, or even childbirth, short-term disability benefits can replace at least a portion of the income you would have earned during that time. Many employers provide this coverage as part of a compensation package, but you can also purchase your own policy.
Short-term disability is insurance coverage. It shouldn’t be confused with the Social Security disability benefits provided by the federal government through the Social Security Administration (SSA).
Short-term disability coverage typically replaces some of your income for a few months up to as long as two years. It usually pays anywhere from 40% to 70% of your salary. 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.
- Short-term disability benefits can replace a portion of your income while you're unable to work due to injury or illness.
- These benefits are often part of a compensation package offered by an employer, but you can also purchase your own policy.
- Whether short-term disability benefits are taxable depends who pays for the coverage. If your employer pays all or part of the premiums, your benefits may be taxable.
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.
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 Short-Term Disability Taxed?
Let’s say you collect $9,000 in short-term disability benefits over six months in tax year 2021. Your employer paid half the premiums, and you paid the other half through pre-tax withholding from your paychecks. You must therefore report the entire $9,000 as taxable income on your Form 1040 tax return. You would enter this amount on line 1 of your 2021 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.
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.
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 2021:
|Total Income||Tax Bracket|
|Up to $9,950||10%|
|$9,951 to $40,525||12%|
|$40,526 to $86,375||22%|
|$86,376 to $164,925||24%|
|$164,926 to $209,425||32%|
|$209,426 to $523,599||35%|
|$523,600 or more||37%|
To continue our example above, say you earned $36,000 in salary and wages, plus $9,000 in short-term disability benefits, for a total taxable income of $45,000. The first $9,950 of your income would be taxed at 10%. Then you’d be taxed 12% on the portion of your income between $9,951 and $40,525—which includes most of your salary and the first $4,525 of your short-term disability benefits.
Finally, you’d pay 22% on the portion of your income over $40,525, which is the remaining $4,475 of your benefits.
These tax brackets pertain only to single indIviduals and to married taxpayers who file separate returns. Tax brackets are different and a bit more generous for taxpayers who can file as head of household, and married taxpayers who file joint returns.
How States Tax Short-Term Disability Benefits
Taxation doesn’t begin and end with the federal government, unless you live in one of the nine states that don’t have an income tax:
- North Dakota (taxes only interest and dividend income)
- South Dakota
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 half of 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.