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Is Short Term Disability Taxable in Pennsylvania

It depends entirely on who paid the premium, and that is the only question that matters.

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Kenneth R. Schuster, founding member of Schuster Law
Kenneth R. Schuster Founding Member. Practicing in Delaware County since 1982.

Whether short term disability benefits are taxable depends on who paid the premium and with what money. Where the employer paid, or you paid through pre-tax payroll deduction, benefits are generally taxable. Where you paid the premium with after tax dollars, benefits are generally not taxable.

The rule

Who paid the premium Federal tax on benefits
Employer paid the whole premium Generally taxable
You paid through pre-tax payroll deduction Generally taxable
You paid with after tax dollars Generally not taxable
Shared premium Generally taxable in proportion to the employer paid share

The logic is consistent: money that has not yet been taxed gets taxed when it comes back to you as a benefit, and money already taxed does not get taxed twice.

Pennsylvania state tax is a separate question

Pennsylvania’s personal income tax treats several categories of income differently from federal rules, and disability payments are among the areas where state and federal treatment can diverge. Do not assume the federal answer carries across.

Check your pay stub, not your memory

Most people do not know whether their disability premium was deducted pre-tax or post-tax. It appears on the pay stub, and human resources can confirm it. It is worth establishing before you file rather than being surprised by a tax form the following January.

Some employers offer a choice at enrolment, paying tax on a small premium now so that a potentially much larger benefit arrives untaxed later. Where that option exists it is usually the better arithmetic for anyone who ends up claiming.

If benefits are taxable

You may be able to have withholding taken from payments rather than facing a bill at year end. Ask the insurer, because it is not always offered proactively and a benefit paid at 60 percent of salary with an unexpected tax liability attached is a difficult year.

We are not accountants

This page explains the framework so you know what question to ask. Your own circumstances may include features it does not cover, and the answer should come from a tax preparer who can see your return. What we can do is tell you who paid the premium under the plan documents, which is the fact everything else follows from.

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Questions people ask us about this

Is short term disability taxable in Pennsylvania?

It depends on who paid the premium and with what money. Employer paid premiums, or premiums you paid through pre-tax payroll deduction, generally produce taxable benefits. Premiums you paid with after tax dollars generally produce untaxed benefits.

How do I find out which applies to me?

Check your pay stub rather than relying on memory, and ask human resources to confirm whether the deduction was pre-tax or post-tax. It is worth establishing before you file rather than discovering it from a tax form the following January.

My employer let me choose at enrolment. Which is better?

Paying the premium with after tax dollars means a small tax cost now in exchange for benefits that generally arrive untaxed. For anyone who ends up actually claiming, that is usually the better arithmetic, since the benefit is far larger than the premium.

Is Pennsylvania state tax the same as federal here?

Not necessarily. Pennsylvania's personal income tax treats several categories differently from federal rules, and disability payments are an area where the two can diverge. Do not assume the federal answer carries across to your state return.

Can I have tax withheld from the payments?

Often yes, and it is worth asking the insurer because it is not always offered proactively. A benefit paying around 60 percent of salary with an unexpected tax bill attached at year end makes a difficult year considerably harder.

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