When are disability insurance benefits typically taxable as income?

Disability income benefit taxation depends on who paid the premium and with what dollars. If the employer paid the premium (or the employee paid with pre-tax payroll deductions): benefits are taxable as ordinary income. If the employee paid the premium with after-tax dollars: benefits are received tax-free. If premium responsibility is split, the benefits are split proportionally. This is one reason individually-purchased disability income insurance is so valuable — the same benefit dollar goes further if it is tax-free. Some employers offer a choice: pre-tax premium (lower current cost but taxable benefits) versus after-tax premium (higher current cost but tax-free benefits). For high-income earners, choosing after-tax is usually preferable.