Short-term disability benefits are not taxed in all situations. Here are the rules for when you can expect to owe taxes.
Your Employer Paid Premiums for the Plan
If your employer paid for an accident or health insurance plan for you and you are receiving short-term disability benefits through that plan, you will be taxed on the income it provides to you.
Both You and Your Employer Pay Premiums for the Plan
If both you and your employer paid premiums for the cost of the plan that’s providing you with short-term disability benefits, you have to report only the amounts you received for your disability as a result of the payments that your employer made on your tax return.
You Have a Cafeteria Plan
If you paid for the premiums for the plan providing disability insurance out of a cafeteria plan (a workplace benefit package where you can choose from a variety of benefits) and you did not include the amount of the premiums paid for the plan in your taxable income, then this is considered to be an employer-paid plan. As a result, all disability benefits that you receive from it are considered fully taxable.
You Receive Sick Pay From Specific Sources
If you receive money from your employer while sick or injured, this is considered part of your ordinary taxable salary or wages.
You also must include sick pay from welfare funds, state sickness or disability funds, and employee or employer associations, as well as sick pay from an insurance company that your employer paid the premiums for.