I received short-term disability payments this year. My employer paid some of the premiums and I pay some of the premiums. Everything I read says whether or not they're taxable depends on who pays the premium. How does it work when we both do?
Typically, if you pay the premiums with after-tax dollars, none of the benefits are taxable. If your employer pays the premiums, all of it is taxable. If you reimburse your employer for part of the premiums with after-tax dollars, then you have to prorate the proceeds between taxable and nontaxable based upon the share of the premium that you pay. In other words, if your employer pays one-third of the premium and you pay two-thirds with after-tax dollars, you would pay tax on one-third of the disability payments. Keep in mind that if you reimburse your employer with pretax dollars, all of the benefit is taxable.
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Answered by: David A. Caplan, CPA, is a sole practitioner in Lafayette Hill, Pa.