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Can a business deduct disability insurance premiums paid for employees?

Daniel Walker
Licensed Insurance Agent for 15 Years

UPDATED: Mar 19, 2020

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Can Business Deduct Disability Insurance Premiums Paid For EmployessIf you are a business owner, or a self-employed person who takes out disability insurance for yourself, then you cannot deduct the premiums you pay for your disability insurance plan on your taxes.

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Generally speaking, if you pay any premiums for a disability insurance plan that pays for loss of income, you cannot deduct those premiums. This is because the income received from those policies is taxable.

Accepted Premium Deductions for Businesses

The IRS has a list of insurance premiums that are usually acceptable for businesses to deduct. This list is not entirely exhaustive, but may provide you with some clarification.

  • If you pay premiums to a group health insurance or hospitalization insurance plan for your employees, you can deduct those premiums because those types of policies are considered a benefit offered by you as the employer.
  • If you have liability or malpractice insurance policies that cover your liability for any negligence that results in an injury to a client or patient, you can also deduct those premiums.
  • You can also deduct policies you have for worker’s compensation insurance that would cover claims made by any of your employees for any injury or illness, whether or not the injury or illness is your fault or that of your employees.
  • If you pay premiums on life insurance policies for your employees, you can also deduct those premiums, as long as the policy does not name your or the business as a beneficiary.
  • If you have overhead insurance that pays for business expenses in the event that you are disabled and unable to perform your normal work tasks, then you can also deduct that. If you have a policy that also pays your income during that time, then you cannot deduct those.

Employer-Paid Disability Insurance

In some cases, however, you can deduct premiums that are used for a policy that benefits your employees. These benefits are considered as wages, however, and are subject to taxes on both the employee and employer’s part. You, as the employer, are responsible for paying payroll taxes on any benefits your employee receives from his or her disability plan.

If the employee pays his or her own disability then, of course, you are not responsible for payroll taxes, and the employee does not have to pay taxes on the benefits.

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Typical Disability Insurance Benefits

Generally, employers offer short term as well as long term disability benefits (many states, in fact, require that employers provide benefits for a minimum length of time). Some pay 100% of the premiums for any employee who is eligible for other types of insurance through the company; others offer disability insurance at a group rate, giving their employees the option of deciding whether or not to buy into the policy. Other companies or businesses may simply provide short term disability (or “sick leave”) free of charge, and give their eligible employees the chance to buy into a group long term disability insurance plan.

Many experts these days are recommending that employees, where possible, either opt out of employer-paid long term disability insurance, or at least purchase a supplemental policy. This is because many group insurance policies (at least in terms of disability insurance) have limits on benefits that may not ultimately provide the most protection.

For example, if an employee makes a six figure salary, it can be hard to get enough coverage for that. Most group policies cover at least 60% of a person’s income, but someone who makes so much money may not actually end up getting that much covered. It can also be hard to find a policy that does not exclude bonuses, which is something that makes employees of all types wary.

The Wall Street Journal noticed, in February 2010, that only 48% of companies pay any part of their employees’ long-term disability insurance. This number was down from 59% in 2002. This may be in part due to the general work market, as well as the chance that larger numbers of employees are simply opting out of group disability insurance plans. Plus, there are the tax benefits when an employee pays those premiums.

Accidents that result in a profound disability are all too common, and are a constant fear of many of us, employers and employees alike. It can be difficult to find a disability insurance plan that truly protects a meaningful chunk of our income. The best plans will take a look at our real income, which includes those bonuses and other compensations that we’ve received over a several year period.

Whether or not you decide to offer disability insurance to your employees, take a moment to look into the best options for those employees as well as your business.

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