How to Show Short-Term Disability Payments on a W-2
- 1). Determine how the premiums are to be paid. This will determine if the benefits are taxable. If the employer pays the premium and the amount of the premium is reported as part of the employee's gross income, then short-term disability benefits are taxable. If the employee pays the premium out of post-tax income, then the benefits will not be taxable.
- 2). Set up an optional contribution system if desired. Employers can offer both options to employees, giving workers a choice between being taxed up front in return for tax-free disability payments or deferring taxes on premium payments in order to pay taxes only if benefits are received. If employees choose to be taxed now rather than later, the premium will be added to their income for tax purposes and then withheld to pay for the insurance. The net result in income taxes on the premiums will be paid by the employee each paycheck.
- 3). Instruct employees to choose a payment plan. If employers offer workers the choice between pre-tax or post-tax premium payments, managers should explain that elections are irrevocable until the next plan year. Once an employee has chosen a contribution option, IRS regulations forbid them from changing that option until the next plan year.
- 4). Report the income in the appropriate section of the W-2 form. If the premiums are being paid from pre-tax money, the most common short-term disability situation, then the taxable benefits should be included as part of the employee's gross income, along with wages, tips and other compensation. If the premiums are paid out of post-tax salary, the payments are non-taxable and should be reported in box 12 with code J.
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