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Are Short-Term Disability Claim Payments Considered Earnings?

Updated for Tax Year 2018


OVERVIEW

Temporary disability, such as an injury, serious medical condition, or even pregnancy, can be covered by short-term disability payments obtained through private insurers, and they may be part of an employer's compensation to employees. Whether the payments are taxable depends on how and when they are paid.


Income exemptions

As a basic starting point, all income you receive is taxable unless it is expressly exempted. Such exemptions include worker’s compensation payments and certain compensatory damages awarded through litigation. However, short-term disability payments received under an insurance policy are not exempt, though you may not be liable for additional taxes on such payments if you have already borne the cost of taxation through the structure of the plan.

Employer disability benefits

If you and your employer share the cost of a disability plan, you are only liable for taxes on the amount received due to payments made by your employer. So, if you pay the entire cost of a sickness or injury plan with after-tax money, you do not need to report any payments you receive under the plan as income.

If your employer pays half the cost of premiums and does not deduct these payments from your pay, then you most likely must report half the payments received as income. Reimbursement of medical costs you’ve paid for after the plan was established are generally not taxable, but may reduce the amount of any medical costs deduction.

Cafeteria plans

A cafeteria plan has nothing to do with how you dine. It refers to an insurance program that allows employees to select the coverage they wish to receive from a menu of options. Usually this coverage is paid for by directing pre-tax dollars to the plan.

If the amount of the premiums is paid by your employer or by you with before-tax dollars then you generally must report any payments received as income. If, however, the income used for the plan was paid by you with after-tax dollars, you are considered to have paid the premiums and usually no payments under the plan need to be reported as income.

Reimbursements

There are several exemptions to the basic rule that you must report payments contributed by an employer. You do not have to report as income any payments you receive as reimbursement for medical care because these are presumably paid with after-tax dollars. But a reimbursement will reduce the amount of your medical cost deduction, and any reimbursements in excess of your actual cost are normally taxable.

Benefits received for loss of income under a no-fault car insurance policy are not taxable. As well as payments received for loss of a limb or permanent disfigurement if based on the injury and not on missed work.

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