When the employer pays, benefits are generally taxable.
If the employer pays the premium and does not include it in the employee’s income, short-term disability benefits are generally taxable to the employee. Confirm treatment with your tax advisor.
How benefits are taxed when the employer pays the premium
If an employer pays the entire premium for short-term disability coverage, the benefits an employee receives are generally taxable income. The employer’s premium payment is not taxed to the employee as it is paid, so the tax comes later, when the benefit is received.
Whether the benefit is treated as wages for payroll purposes can depend on who makes the payments. Some insurers handle the reporting and withholding. In other arrangements the employer must do so. The way the benefit is paid, on its own or through payroll, should be agreed at the start so that withholding and W-2 reporting are correct.
Employer-paid coverage has advantages. It is a visible benefit, participation is complete, and the cost is predictable. The cost is that employees receive a benefit that is reduced by tax.
We explain the three options, employer-paid, pretax employee-paid, and after-tax employee-paid, and help employers compare them on cost, employee value and administration. A tax adviser should confirm the treatment for any particular situation.
What to decide and where it connects
See the After-Tax Option
Employee-paid, after-tax premiums are treated differently.
See the Pretax Option
Pretax payment changes the result again.
Read the Parent Guide
Coverage, cost and compliance for short-term disability.
Questions about this topic
Are employer-paid disability benefits taxable?
Generally yes. Benefits paid under a plan funded by the employer are generally taxable income to the employee.
Does the employer have any payroll tax duty?
Sick pay can carry withholding rules. Confirm with your payroll provider and tax advisor.
Can we switch who pays the premium?
Yes, but it changes the tax result. Review it with a tax advisor first.
Ready? Send us your renewal, or talk it through with someone first. General information, not legal or tax advice.
Where these details come from.
IRS Publication 15-A: Taxation of sick pay and disability benefits.
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