Disability Income

Today TaxMama hears from Sal, who tells us. “In the year 2006 an employee of a non profit social service organization located in New York State received third-party sick pay directly from an insurance company. A separate W-2 showing the sick pay was issued to the employee. It shows no Federal, State or Local withholding taxes, but does show withheld amounts for Social Security and Medicare. Is the sick pay taxable by New York State and the Federal government?“

Hi Sal

When it comes to disability income, the Federal rules are a bit complicated. And I have no idea what your state rules are. You’ll have to ask them. https://www.tax.state.ny.us/forms/

IRS does a pretty good job of explaining the Federal rules here:
Look at the second question. https://www.irs.gov/faqs/faq4-9.html

It basically boils down to this – if no one took deductions for the cost of the disability insurance premiums, the income is not taxable. If your boss did, but you didn’t – part of the income may be non-taxable.

If you paid them and took deductions, or if your employer paid the premiums and deducted the cost, as most employers do – the benefits are taxable.

Income from State disability benefits are not taxable at all.

What intrigues me is that the folks issuing the payment seem to have gotten it backwards. Odds are, the income is taxable for Federal and State purposes – but not for FICA and Medicare.

Typically sick pay is not subject to FICA and Medicare withholding.

As to no withholding for IRS and NYS – you can fix that. Just give the paying organization a W-4 with the desired amount of exemptions – and they’ll start deducting taxes. I hope this helps a bit?


And remember, you’ll find answers to lots of questions, about disability income, and other tax information, free. Where? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips. Please click on the subscribe link and join us.]

To make your comments, please visit TaxMama’s Parlor at TaxTwist.com.

  • Ask TaxMama :: Where taxes are fun and answers are free
  • TaxTwist.com :: Where TaxQuips will be moving & You can add your comments
  • New York State :: Department of Taxation and Finance
  • IRS FAQs :: Life Insurance & Disability Insurance Proceeds
  • IRS Form W-4 :: To change your withholding

File Download (0:00 min / 0 MB)

Leave a Reply