If you think that paying for your employee’s disability premiums is a good thing for your employee, then consider this. If you provide your employees disability as a nontaxable benefit, then the payments they receive if they collect 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 an extended period of time – can be far less than the tax due on the income received under the policy. Not unlike other types of insurance, it will all depend on whether you actually collect under the policy.