Is Short-Term Disability Considered on a Before-Tax or After-Tax Basis?

Short-term disability is an insurance intended to replace some of your income when you are unable to work due to illness, short-term disability or giving birth. People are generally grateful for the payments and do not think about tax considerations until tax time. The Internal Revenue Service taxes short-term disability income based on the tax basis of the insurance premiums.

TL;DR (Too Long; Didn't Read)

The tax basis for your short-term disability will depend on your insurance premiums' tax basis.

Understanding Before-Tax Basis

You will need to know whether your short-term disability insurance payments are paid on a pre-tax or after-tax basis. If the premiums are paid before-tax, whether paid by you or your employer, then any income or payments you collect from the policy must be included in your gross income. The insurer will issue a W-2 for any payments you collect. This income is taxable, according to the IRS.

Premiums paid by the employer or employee on a pre-tax basis will not be reported on the employee's W-2 form, and the amount of the premiums are not included in gross income.

Exploring After-Tax Basis

If the short-term disability insurance premiums were paid on an after-tax basis, then any income you collect from the policy is not taxable and should not be included in your gross income. The insurer will not issue a W-2 for these payments. However, the insurance premiums themselves are taxed and included in gross income. The premiums paid by the employer or by you on an after-tax basis are reported on the employee's W-2 form.

You can ask your employer to pay your insurance premiums after-tax. Generally, this request must be made at the beginning of the year and you cannot switch back and forth.

Basis for Cafeteria Plans

Electing to pay your short-term disability insurance premiums through a cafeteria plan means you are paying the premiums pre-tax. Since you are not paying tax on the premiums, your short-term disability payments will be taxable income. If you wish to pay the premiums after-tax, you will not be able to use your cafeteria plan for this expense.

Reporting Tax Payments

The taxable income you receive from short-term disability should be reported on your tax form on the line for wages, salaries and tips. You can elect to have federal income tax withheld by filing IRS Form W-4S, the Request for Federal Income Tax Withholding from Sick Pay, with the insurance company from which you receive your benefits. Or, if you want to make estimated tax payments to the IRS yourself, file IRS Form 1040-ES, the Estimated Tax for Individuals form.

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