Long-term disability payments are usually taxable, but only if your employer paid the premiums

Whether you owe federal income tax on long-term disability (LTD) payments depends on a single fact: who paid the premiums for the policy. If your employer paid the premiums, the payments are taxable income. If you paid the premiums with after-tax dollars, the payments are not taxable. If you split the cost with your employer, part of each payment is taxable and part is not.

This rule applies to all long-term disability insurance, whether through your job, a union, or a private policy you bought yourself. The IRS treats it the same way: employer-paid premiums create taxable benefits; employee-paid premiums do not. Your disability insurance company and your employer are required to tell you which category you fall into, and they report it to the IRS on a Form 1099-R.

Long-term disability is different from Social Security Disability Insurance (SSDI), which has its own tax rules based on your total income. It is also different from workers' compensation, which is never taxable. Understanding which type of income you receive matters because the tax treatment is not the same.

Key Takeaways

  • Long-term disability payments are taxable only if your employer paid all or part of the insurance premiums.
  • You can find out who paid your premiums by checking your employee benefits documents or asking your employer's human resources department.
  • Your disability insurance company will send you a Form 1099-R showing the taxable and non-taxable portions of your payments.
  • If you paid premiums with pre-tax payroll deductions, those payments are taxable; if you paid with after-tax money, they are not.
  • State disability insurance programs have different rules — some states tax the payments, and some do not.

How to learn about your long-term disability payments are taxable

Start by locating your original benefits documents from when you enrolled in the plan. These documents — usually called a Summary Plan Description, Summary of Benefits, or employee handbook section — state whether premiums are paid by the employer, the employee, or both. If you cannot find the original documents, call your employer's human resources or benefits department and ask directly: "Who pays the premiums for the long-term disability plan?" They can tell you in one conversation.

If you left the employer years ago or the company no longer exists, contact the disability insurance company directly. The company name appears on your benefit statements or payment letters. Tell them you need to know the tax status of your payments for filing purposes. They have records of how premiums were paid and can confirm whether your payments are taxable.

Do not rely on memory or assumptions. The tax treatment hinges on this one fact, and getting it wrong can mean underpaying taxes or missing a deduction you were may have access to to claim. Write down the answer and keep it with your tax records.

Employer-paid premiums mean your payments are taxable income

If your employer paid the premiums — whether all of them or part of them — those premiums were a form of compensation to you. The IRS does not tax the premiums when your employer pays them, but it does tax the benefits when you receive them. This is the most common situation for group long-term disability plans offered through employers.

When you receive a payment, the full amount (or the employer-paid portion, if premiums were split) counts as ordinary income. You report it on your federal tax return the same way you would report wages. Your disability insurance company will send you a Form 1099-R in January showing the taxable amount in Box 1. You then report this amount on your tax return, usually on line 7 (Other Income) of Form 1040, or on Schedule 1 if you use that form.

You may also owe state income tax on the payments, depending on your state. Most states that have income tax treat employer-paid disability benefits the same way the federal government does — as taxable income. A few states do not tax disability benefits at all. Check your state tax agency's website or ask a tax preparer about your specific state.

Employee-paid premiums mean your payments are not taxable

If you paid the premiums yourself with after-tax dollars — money that came out of your paycheck after taxes were already withheld — then the benefits you receive are not taxable. You already paid tax on the money that went into the premiums, so you do not pay tax again when you receive the benefit.

This situation is less common in group employer plans but more common in individual disability policies you buy on your own. It also applies if you paid premiums through a union or professional association with after-tax money.

Even though the payments are not taxable, you still receive a Form 1099-R from the insurance company. Box 1 will show the payment amount, but Box 2a (Taxable amount) will show zero or will be marked to indicate the payment is not taxable. Keep this form with your tax records as proof that you do not owe tax on the payments.

Split premiums: part taxable, part not

Some employer plans require both the employer and employee to contribute to the premium. In this case, your payments are split: the portion funded by the employer is taxable, and the portion you funded with after-tax dollars is not.

The insurance company calculates this split based on the ratio of premiums paid. For example, if the employer paid 70 percent of premiums and you paid 30 percent, then 70 percent of each benefit payment is taxable and 30 percent is not. The Form 1099-R will show both the total payment and the taxable portion separately.

If your premiums were deducted from your paycheck before taxes were withheld (a pre-tax deduction), the entire benefit is taxable. Pre-tax premiums are treated the same as employer-paid premiums for tax purposes because the employer effectively paid them by reducing your taxable income.

State disability insurance programs and their tax rules

Some states run their own disability insurance programs, separate from employer plans. California, Hawaii, New Jersey, New York, and Rhode Island all have state disability insurance (SDI) or temporary disability insurance (TDI) programs. The tax treatment of these payments varies by state.

California, Hawaii, and New Jersey do not tax state disability insurance benefits. New York taxes them as ordinary income. Rhode Island taxes them but allows you to exclude a portion. If you receive payments from a state program, check your state tax agency's website or ask a tax preparer about the rules in your state. The state insurance agency will also send you a form showing what portion, if any, is taxable.

What to do when you file your taxes

Gather your Form 1099-R from your disability insurance company. This form arrives by January 31 each year and shows the total payments you received and the taxable portion. If the taxable amount is zero, you do not report the income on your return, but keep the form for your records.

If the taxable amount is greater than zero, report it on your federal tax return. On Form 1040, this usually goes on line 7 (Other Income) or on Schedule 1 if you file that form. Some tax software will ask you directly about disability income and place it in the correct location automatically.

If you also receive SSDI, remember that SSDI has different tax rules. SSDI is taxable only if your combined income (SSDI plus other income, including taxable long-term disability) exceeds certain thresholds. Long-term disability counts toward that threshold. See the SSDI tax rules for more detail on how to calculate whether your SSDI is taxable.

If you owe tax on the disability payments and did not have taxes withheld, you may owe estimated tax payments. Talk to a tax preparer or your state tax agency about whether you need to file quarterly estimated tax payments.

Frequently Asked Questions

Can I deduct the premiums I paid for long-term disability insurance?

If you paid premiums with after-tax dollars, you cannot deduct them on your federal tax return. However, if you are self-employed and paid premiums for a disability policy, you may be able to deduct them as a business expense. Consult a tax preparer about your specific situation.

What if I do not receive a Form 1099-R from my disability insurance company?

Contact the insurance company and ask them to send it. They are required to issue a 1099-R for any disability payments over $600 in a calendar year. If they do not respond, contact your state insurance commissioner's office to file a complaint.

Do I owe Social Security and Medicare taxes on long-term disability payments?

No. Long-term disability payments are not subject to Social Security (FICA) taxes. You do not pay into Social Security on these payments, and they do not count toward your Social Security earnings record.

If I receive both long-term disability and SSDI, how do I report both on my taxes?

Report each on your tax return separately. Long-term disability goes on line 7 (Other Income) of Form 1040. SSDI goes on line 5 (Social Security benefits). However, the taxability of your SSDI depends on your combined income, which includes the long-term disability payments. Calculate your combined income first, then determine whether any SSDI is taxable.

Will receiving taxable long-term disability payments affect my benefits?

Long-term disability payments do not affect SSDI, which is based on your work history and disability status, not income. However, if you receive Supplemental Security Income (SSI), any income — including taxable disability payments — counts toward your SSI limit and may reduce your benefit. Check with Social Security if you receive SSI.