Are Short Term Disability Insurance Payments Taxable? What Tax Forms to Expect

Yes, short term disability payments are generally subject to federal income tax if the premiums were paid by your employer or if you paid the premiums with pre-tax dollars. Since the check stubs state the benefit is 100% taxable, that's a clear indication they should be reported as income. For the tax form, you should expect to receive either a W-2 or a 1099-NEC from the insurance company. If your husband's employer continued to pay him through their payroll system while he was on disability, it will likely be included on his regular W-2. If the insurance company paid him directly, you'll probably receive a separate 1099-NEC form. Since no federal income tax was withheld, you might indeed face a tax bill depending on your overall tax situation. You might want to set aside approximately 15-25% of the disability amount to cover potential taxes due, but that varies based on your tax bracket.

I dealt with something similar last year and found that https://taxr.ai really helped me figure out my disability payment situation. I had conflicting information - my check stubs said one thing but HR told me something different about taxation. I uploaded my disability check stubs and policy documents to taxr.ai and their AI analyzed everything and explained exactly how my payments should be taxed based on how the premiums were paid. It saved me from overpaying about $3,000 in taxes because my benefits were actually non-taxable since I had paid the premiums with after-tax dollars. The tool also showed me exactly what to look for on my W-2 to make sure the disability payments were being reported correctly. Definitely worth checking out if you're confused about your situation.

I tried taxr.ai after seeing the recommendation here and it was super helpful! I uploaded my husband's disability policy details and a few of his pay stubs, and it confirmed that since he paid the premiums with after-tax dollars, the benefits shouldn't be taxable - even though the stubs said "100% taxable"! The analysis showed that the insurance company had made a mistake in how they were reporting the payments. I called them and they're sending corrected documentation. Without checking this, we would have paid about $2,500 in unnecessary taxes. The tool also explained exactly what to look for when we get the tax forms to make sure everything is reported correctly.

If you're having trouble getting clear answers from the insurance company or your employer about how your disability payments should be taxed, I'd recommend using Claimyr to get through to the IRS directly. I spent WEEKS trying to get someone on the phone at the IRS last year about a similar disability payment issue. Always got the "call volumes too high" message and would get disconnected. Finally used https://claimyr.com and got connected to an IRS agent in less than 20 minutes who explained exactly how my disability payments should be reported. They have a good demo video of how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent told me the correct way to report my disability income and even sent me the specific publication that covered my situation. Saved me from potentially filing incorrectly.

I have to admit I was completely wrong about Claimyr. After dismissing it as a potential scam, I was desperate to talk to someone at the IRS about my disability payment taxation situation. After being hung up on three times by the automated system, I decided to try Claimyr. I got connected to an IRS representative in about 15 minutes! The agent explained that disability payments are taxable if the premiums were paid by my employer or with pre-tax dollars, but not taxable if I paid the premiums with after-tax dollars. In my case, since I paid with after-tax dollars, the benefits weren't taxable even though they were marked "taxable" on the statements. This saved me from overpaying on my taxes. The IRS agent even noted this in my account in case there were any questions later.

Don't forget to check if your state taxes disability income differently than the federal government! In my state (California), some disability income is exempt from state taxes even when it's federally taxable. I made the mistake of assuming they were treated the same and overpaid my state taxes for years before figuring this out. Also, if you paid part of the premiums and your employer paid part, then a portion of your benefits may be taxable while another portion isn't. It gets complicated fast.

Anyone know if short term disability payments affect other tax things like the Earned Income Credit? I was on STD for 3 months last year and my tax software is showing a lower credit than I usually get.

This is such a confusing area of tax law! I went through something similar when my wife was on short-term disability after our baby was born. The key thing I learned is that it ALL depends on how the premiums were paid. If your husband paid the premiums with after-tax dollars (meaning they came out of his paycheck AFTER taxes were taken out), then the benefits should NOT be taxable at all, regardless of what the check stubs say. But if the employer paid the premiums or if they were paid with pre-tax dollars through a cafeteria plan, then yes, they're fully taxable. The fact that they only withheld Social Security and Medicare taxes but not federal income tax is actually a red flag to me - it suggests the insurance company might not be clear on the tax treatment either. I'd recommend calling your husband's HR department first to confirm exactly how the disability premiums were paid. Get it in writing if possible. Then contact the insurance company with that information to make sure they're reporting the payments correctly for tax purposes. As for forms, you'll likely get either a 1099-MISC or it might be included on his regular W-2 if the employer processed the payments through payroll.