If you think that paying for your employee’s disability premiums is always a good thing, think again. If you provide your employees disability as a nontaxable fringe benefit, payments they receive upon their disability will be, in most cases, FULLY taxable to them!
Payments received due to disability are not taxable if:
- Your employees paid the premiums on the policy with after-tax funds, OR,
- You paid the premiums but deducted the amount from their income.
The cost of disability insurance – even over a good amount of time – can be far less than the tax due on the income received under the policy. Like all insurance, it all depends on whether you actually collect under the policy.