The answer to that is, it depends. Long-term disability benefits can be a little tricky. Sometimes it's taxable and sometimes not. Generally, if you paid the premiums for the long term disability insurance then the benefits are not taxable. If the company paid the premiums, or you paid them through a pre-tax plan, then the benefits will be taxable. The IRS provides the following guidance:
- If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employer’s payments is reported as income.
- If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return.
- If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.
- If the amounts are taxable, you can submit a Form W-4S (PDF), Request for Federal Income Tax Withholding From Sick Pay, to the insurance company, or
- Make estimated tax payments by filing Form 1040-ES (PDF), Estimated Tax for Individuals
In the event that your long term-disability payments are taxable they will be reported to you on a W-2. You will report these payments as wages on line 7 of your tax return.
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