If there is an amount in Box 12 with a Code J, then the short-term disability is not taxable.
Whether the payments are taxable depends on how and when they are paid. If all or a portion is taxable, the taxable portion will be reported on your W-2 that is issued by your employer, or reported on a Form W-2 issued by the insurer.
If you receive a W-2 for a third party sick pay, with no amount in box 1 for wages and the income is reported in box 12 with code of J: Non-taxable sick pay is not subject to taxation. It does not need to be reported on your income taxes. Your employer was required to generate a W2 with the figure, which is why you received it. So basically you do not need to file this return, per IRS.
Disability paid by an insurance company for things like lost wages, loss of limb, or loss of sight may or may not be taxable, depending on circumstance:
- If the premiums were paid by your employer and weren't included in your taxable income, the disability is taxable
- If you paid the premiums out of your own pocket or with payroll deductions that came out of your after-tax income, the disability isn't taxable
- If you and your employer jointly paid the premiums, only the disability amount covered by your employer's payments are taxable
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