Do I Have to Pay Taxes on Disability Benefits?

The taxability of disability benefits depends on the source of the payments. Social Security Disability Insurance (SSDI) benefits follow the same rules as regular Social Security retirement benefits — up to 85% may be taxable depending on your total income, but many people with SSDI as their primary income pay little or no tax. Supplemental Security Income (SSI) is always tax-free. For employer-provided disability benefits: if your employer paid the premiums for short-term or long-term disability insurance, the benefits you receive are fully taxable as ordinary income; if you paid the premiums with after-tax dollars, the benefits are tax-free. If you and your employer both paid premiums, the benefits are partially taxable based on the proportion the employer paid. Workers' compensation for job-related illness or injury is generally tax-free. Veterans' disability benefits from the Department of Veterans Affairs are completely tax-free. The key question is always who paid for the coverage — employer-paid premiums create taxable benefits, while employee-paid after-tax premiums create tax-free benefits.