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Is disability insurance tax-deductible?
You can deduct your premiums as a business expense in some situations.
The main benefit of having a disability policy is to replace part of your income if you become disabled. The tax implications of a disability policy are less clear. There are instances that you can deduct the premiums from your taxes, but doing so means reporting the income on your taxes if you collect a disability benefit.
Are disability insurance premiums tax-deductible?
You can’t deduct your disability insurance premiums from your personal taxes. You can deduct certain medical, dental, and long-term care insurance from your taxes, but life insurance and disability don’t qualify for a deduction.
According to the IRS, you can’t deduct premiums for the following policies:
- Coverage for loss of life, limbs, sight, etc.
- Policies that pay you while you’re hospitalized for sickness or injury.
- Life insurance policies
- Coverage for loss of earnings
Essntially, all money is taxed at some point, whether it’s coming in or going out — but it can only be taxed once. This means money that’s initially taxed won’t be taxed later. This applies to your disability premiums. Since it’s taxable money up front, if you become disabled and use the policy then the money you receive will be tax-free.
Does it matter if I have a short-term or long-term disability policy?
No. The tax implications are the same regardless of how long you collect on a disability policy.
Can I deduct my disability insurance premiums if I’m a business owner?
If you’re a business owner, there are some instances where you deduct disability insurance from your taxes. It will depend on the type of business entity you own, who’s paying the premiums, and whether they’re using pre-tax or after-tax money.
Sole proprietors
Sole proprietors can’t deduct disability insurance premiums from their business taxes — just like an individual can’t deduct disability premiums from their personal taxes.
The business in a sole proprietorship is legally the same as the individual who owns it, it’s not treated as a separate legal entity. This means that all business income is taxed to the individual.
S-corporations
Disability insurance premiums may be deducted by an S-corporation on shareholders or employees who own at least 2% of the business.
If an S-corp is paying the premiums for a disability policy for one of its employees, they can deduct that premium from their taxes. The employee can’t deduct the premiums on their own taxes, but they will receive the benefit tax-free if they collect on the policy.
C-corporations
C-corporations may deduct disability premiums from their taxes if it pays for premiums on behalf of the employee. Shareholders who are not employees do not qualify for the premium to be deducted.
However, if the C-corp excludes the premiums from the employee’s income, then the benefit will be taxable if the employee collects.
LLC’s
LLCs operate the same way as C-corporations and can deduct disability premiums from the LLC’s taxes. However, the benefits might be taxable to the employee or shareholder. If the employee or shareholder pays their own premiums, then the benefit will be tax-free.
Disability insurance for self-employed individuals
Do I have to report disability income on my taxes?
Yes, you will need to report disability income on your taxes in most situations. However, what you need to do depends on how much money you make and where the money is coming from.
Individual disability income insurance
The only time you don’t have to report disability income on your taxes as an individual is if you make less than $25,000 a year, or less than $32,000 a year as a household.
Employer-sponsored insurance
These plans depend entirely on who is paying the premiums, and how.
- You pay. If you pay the premiums using after-tax dollars, then your benefits are tax-free and you won’t have to report the income.
- Employer pays. If the employer pays for the entire policy and doesn’t include this cost in your gross income, then the benefit is taxable and you’ll need to report the income on your taxes.
- Split pay. If you and your employer split the cost of the premiums, then the taxes are also split. You receive a portion of the benefit that you already paid for tax-free, but you’ll owe taxes on the part that was paid by your employer.
It also comes down to how you pay premiums. If you pay for the premiums with pre-tax money, then you’ll need to report the income on your taxes. If you pay for the premiums with after-tax income, then you don’t need to report it. You can confirm with your employer if your disability plan was set up as pre-tax or after-tax.
Cafeteria plans
Cafeteria plans follow a similar model as employer-sponsored insurance. If you contribute to the cafeteria plan with pre-tax money, then the collected payments must be reported as income. However, if you use after-tax money to contribute to the plan, then you won’t need to report the collected money as income, since you are considered to have paid the premiums yourself.
Group policies
Group disability policies operate exactly the same way as cafeteria plans. If you pay your cost of the group disability policy with after-tax money, then you will receive the benefits tax-free. But if you pay for it using pre-tax money, then you’ll be taxed on the benefit.
If your employer pays the premiums, it will work just like an employer-sponsored disability insurance policy.
Social Security benefits
If Social Security Disability Insurance (SSDI) is your only income, you usually won’t need to pay taxes on it. However, there are income thresholds for paying taxes on Social Security disability benefits.
| Status | Not Taxed | Taxed up to 50% | Taxed up to 85% |
|---|---|---|---|
| Individual | |||
| Married |
Compare disability insurance companies
Since you’ve got a wide variety of options, use the table below to review some of your choices. Check the compare box below the providers then click compare to see the details listed side by side.
Updated April 7th, 2020
Bottom line
Disability insurance premiums can be deducted as a business expense in some situations — but that doesn’t apply to personal taxes. The details and premiums for disability policies can vary, so if you’re in the market for a policy, compare disability insurance companies to find the best fit for you.
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