Disability Insurance Premiums Should Be Taxable Employee Compensation

If you provide disability insurance to your employees at no or reduced cost to them, then any future benefits they collect will be taxable, significantly reducing their benefits. However, if the employer includes the disability premium in the employee's taxable income, then the benefits are not usually taxable. The IRS has ruled that employees may elect on a year by year basis whether or not to include the premiums in their wage income. If the employee becomes disabled in that year and begins to receive benefits, then none of them are taxable, even if the premiums in previous years were not included in income. Consider having your employees make this irrevocable election each year prior to year end.