Losing the ability to work is a relatively common but disruptive fact of life, which is why disability insurance programs exist. In fact, New York is one of the few states that requires most employers to offer short-term disability insurance to supplement the federal Social Security Disability Insurance (SSDI) program. Certainly the payments are a welcome help when the checks arrive, but come April trying to figure out which payments are taxable can make your head hurt.

In most cases, disability payments through a New York income replacement insurance plan are taxable. Whether or not your short-term disability payment is taxable depends on whether or not you’ve already paid taxes for it. The government isn’t going to let you have your income tax-free without a good reason, but at the same time it’s not fair to tax you twice on the same income. Consequently, the government requires taxes to be paid either when the premiums for the insurance plan are paid, or else when the distribution payments are made (but not both).

The majority of New York employers split the cost of short-term disability insurance with their employees. That means that because the employer is paying for a part of the premium, the employee doesn’t have the opportunity to pay taxes on that part of the premium, so he or she will have to pay taxes when a distribution payment is made.

The part of the premium paid by the employee is more complicated because there are three possible scenarios:

1. The Employee Does Not Pay Taxes on the PremiumOne possibility is that the employee simply did not pay taxes when the premium was paid. In cases like this, he or she will be taxed on the distribution payments.
2. The Employee Pays the Premium with Pre-Tax DollarsIn many cases, employers will make an employee’s contribution for him or her and deduct the amount from the employee’s earnings. Because this is typically done before the employee receives his or her income—and thus before he or she incurs any taxes on it—employee premiums that are paid with pre-tax dollars result in the employee being taxed upon the distribution payments.
3. The Employee Pays the Premium with Post-Tax Dollars

Finally, it is possible (although less common) for an employee to pay his or her share of the short-term disability insurance premium with income that has already been taxed. In that scenario, the employee will not be taxed on payments from the insurance plan.

If you are receiving disability payments it means that you’re unable to work, which means every dollar counts. Our firm understands that, and our attorneys are tax experts with years of experience helping clients living on limited incomes make sure they receive every last cent that they’ve earned. If you’re receiving disability payments through a New York short-term disability program or through any other disability insurance program and you have questions about paying taxes on the distribution payments, call us to arrange a free consultation.