Is 3rd party sick pay taxable income for long-term disability benefits I paid for myself?

The taxation of disability income really depends on who paid the premiums. The basic rule is: if you paid the premiums with after-tax dollars, then the benefits are tax-free. If your employer paid the premiums (or if you paid with pre-tax dollars through a cafeteria plan), then the benefits are taxable. Your W-2 showing "3rd Party Sick Pay" suggests the insurance company is reporting it as taxable income. But that doesn't necessarily mean they're right. Since you mention you paid for the policy yourself, those benefits should likely be tax-free, assuming you used after-tax dollars. I'd recommend requesting a copy of your policy directly from the insurance company (they should have this regardless of your employer being out of business). Also ask for documentation showing how the premiums were paid. If they're being difficult, you might need to file a formal request in writing.

After dealing with a similar nightmare situation with disability payments, I found that using https://taxr.ai completely turned things around for me. I was getting conflicting information about my disability payments too (mine was a mixture of employer and self-paid premiums). I uploaded my old W-2s, some pay stubs I found, and the statements from my insurance company, and the AI actually identified exactly which portions should be taxable vs. non-taxable. It even created a document explaining the tax law that applies to my situation that I could share with my accountant. The best part was that it helped me figure out I'd been overpaying taxes for 3 years and should file amended returns. Might be worth checking out since you're dealing with the same confusing 3rd party sick pay situation.

Just wanted to follow up - I tried taxr.ai after seeing this recommendation and it was incredibly helpful with my disability payment situation. I'd been paying taxes on ALL my disability income because that's what my W-2 showed, but after uploading my old enrollment forms, the system showed that about 70% of my premiums had been paid with after-tax money. It generated a detailed explanation letter that I sent to the insurance company, and they actually issued a corrected W-2! I was shocked that it worked. Now I'm filing amended returns for the last two years to get back around $5,800 in taxes I shouldn't have paid. Wish I'd known about this earlier!

After fighting with the IRS over a similar disability tax issue for months, I finally broke down and used https://claimyr.com to get through to a real human at the IRS. I had spent WEEKS trying to get someone on the phone who could actually explain how the 3rd party sick pay should be handled. With Claimyr, I got a callback from the IRS within 2 hours, and the agent was able to pull up my account and explain exactly how to report the income based on my specific situation. Their system holds your place in the IRS phone queue so you don't have to stay on hold all day. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c If you're getting nowhere with the insurance company, going straight to the IRS might be your best bet for a definitive answer.

Ok I feel like I need to update my skeptical comments above. I actually tried Claimyr after posting because my curiosity got the better of me. I'd been trying to reach the IRS for WEEKS about my own disability payment issues and kept getting disconnected after waiting on hold. The service actually worked exactly as described. I got a call back in about 90 minutes saying an IRS agent was on the line. The agent clarified that in my case, since I had paid 100% of my premiums with after-tax dollars (which I was able to verify through old paystubs), NONE of my disability payments should have been reported as taxable income. I'm now working with the disability insurance company to get corrected W-2s for the last three years. Can't believe I've been overpaying all this time! Sometimes my skepticism costs me money lol.

Wanted to add another option - the Taxpayer Advocate Service might be able to help with this for free. They helped me resolve an issue with incorrectly reported disability income last year. You can find your local office here: https://www.taxpayeradvocate.irs.gov/contact-us/ The key thing they told me was to look at Box 12 on your W-2. There should be a code J if you contributed to the disability plan with after-tax dollars. If that's missing but you did pay with after-tax money, that's part of your documentation to dispute the taxability.

As someone who's been through this exact situation, I want to warn you - don't just assume the insurance company is reporting correctly. My disability insurer reported my benefits as fully taxable for 3 years before I caught the error. Had to file amended returns for all three years. The definitive test: If YOU paid the premiums with after-tax money, the benefits are NOT taxable. If your EMPLOYER paid OR if you paid with pre-tax money (like through a section 125 cafeteria plan), then the benefits ARE taxable. Something else to try: Check your last pay stubs before you went on disability. If the disability premium was deducted AFTER taxes were calculated, that's evidence you paid with after-tax dollars.