CA employer voluntary plan and taxation of short term disability benefits.

[Bewildered]

I was separated from my employer (fired), but days prior I had a relapse of a disability and out sick. Now unemployed I contacted the CA EDD to file for UI however was informed I'm not eligible given I'm disabled, but may qualify for CA DI benefits. I followed through with the application and doctor certification of disability. The application was approved. However, EDD determined that since I was disabled for the 5 days prior to termination, my former employer is "liable" for DI benefits. My former employer has an approved voluntary plan with the state. My employer concurred with the EDD assertion. I am not receiving any additional company offered disability benefits - only the exact gross amount the EDD determined was my calculated daily benefit amount. My employer is withholding state and federal taxes on these payments. Under another circumstance if I had become disable while seeking employment, the state would pay me directly and these payments would NOT be considered taxable income for either state for federal. My question (at last) - given I'm only getting disability benefits equal to the EDD calculated amount, is the benefit/income taxable or not? I feel this a nothing more than a pass through of state DI payments through the employer to me. As an employee, VDI was deducted from my wages. I did not pay any % of cost sharing for the employer voluntary plan cost.

[MaryK1 · Accepted solution]

According to the Internal Revenue Service, disability insurance (DI) benefits (including VDI) which are considered a substitute for Unemployment Insurance are fully taxable.

Normally, if you do not work because of a disability and receive DI benefits, part or all of the benefits may not be taxable. However, if you claim the disability payments AFTER you are unemployed  and begin receiving DI benefits because of the illness or disability, the benefits are considered a substitute for UI and are reportable for tax purposes up to your UI maximum benefit amount. (Federal Tax Regulation Section 1.85-1 states that DI benefits are considered to be in the nature of UI benefits when paid to an unemployed taxpayer who is ineligible for UI benefits solely because of the disability.)

[Bewildered]

Thanks MaryK1. 

My former employer has been withholding taxes on these DI benefits. Though not received yet, I'm confident these earnings will be lumped into my total 2018 earnings on my W2 as was the case for 2017. Assuming no notation of disability earnings from regular earnings, how would one call the earnings out separately for tax return purposes?