California Voluntary Disability Plan

[AL248]

I received disability payments through my employer's California Voluntary Disability Plan (VDP), which is a substitute for California State Disability (SDI) by EDD. MetLife which administered the Voluntary Disability Plan sent me a W-2 for the amounts I received. However, EDD told me that EDD's SDI does not need to be reported as income on tax return and thinks it should be the same for VDP payments. But my CPA is saying that it should be reported as income since MetLife issued the W-2 with the payment amount listed in Box 1. He's saying  that the only way it would not need to be reported is to have zero amount in box 1 wages, and code J  in box 12. Is that correct? I think MetLife issued the W-2 to show how much taxes were deducted from the disabiltiy payments.

[MonikaK1]

It also depends on whether the payments were considered regular sick pay or paid family leave.

According to this California EDD Information Sheet:

Section 931.5 of the Section 931.5 of the California Unemployment Insurance Code (CUIC)  provides that third-party sick payments are “wages” for the purpose of reporting Unemployment Insurance (UI) and Employment Training Tax (ETT). These payments are also reportable as Personal Income Tax (PIT) wages, which are wages subject to California PIT. 

Even though PIT withholding on these wages is not mandatory, the wages are considered taxable income to the recipient and must be reported on the recipient’s California income tax return. Without exception, payments for third-party sick pay are not subject to State Disability Insurance* (SDI).

However, according to Publication 15-A, Employer's Supplemental Tax Guide, third party sick pay wages should only be reported in Box 12 of the W-2, not in Box 1.

In California, Paid Family Leave (“PFL”) provides benefit payments to people who need to take time off work for certain family issues.  PFL paid by the California Employment Development Department (EDD) is reported on Form 1099-G, while PFL paid through a Voluntary Plan for Disability Insurance (“VPDI”) is reported on a W-2, either through the employer or a third-party insurer.  Generally, PFL is taxable on the federal return, but not taxable to California.  

If you believe that your employer included amounts paid by the State on your Form W-2, contact the employer for an explanation and a corrected W-2, if applicable. An employer should only include Paid Family Leave on a W-2 if it was paid through the employer or their third-party insurer.

See this help article for more information from TurboTax on Paid Family Leave.

The amount TurboTax shows in the California interview for PFL, asking if you need to edit it, is generally because the user checked a box in completing the W-2 in the Federal section indicating that some or all of the W-2 was attributable to Paid Family Leave.

If you indicate in the Federal section that some or all of the W-2 is attributable to PFL, TurboTax displays a PFL adjustment screen in the California interview, showing the total wages from the W-2 marked by the user as containing PFL and asking the user to review and adjust the amount as needed. The screen also instructs, “Don’t include PFL income reported on a 1099-G. This will automatically be deducted from your California income.”

If you got a W-2 from an insurance company for PFL, then you do subtract it from California wages. If, however, your employer just paid regular wages in your W-2, then you don't subtract it from California wages and you should remove it from the amount in the California PFL screen.

Any PFL reported on a Form 1099-G will automatically be deducted from your California income. Don't deduct it separately on the screen where you deduct PFL from an insurance company or you will get a double deduction. Also, don't deduct regular W-2 wages as PFL.

See also this California EDD webpage for more information on Paid Family Leave.

[AL248]

Payments I received was not for Paid Family Leave, but for California Voluntary Disability Plan (VDP), which offset some of my long term disability (LTD). So during my LTD, I received VDP payment and LTD payment separately. MetLife didn't issue a W-2 for LTD because that is not taxable (as I fully paid the premium for the LTD plan with after tax dollars). But MetLife issued a W-2 for the VDP payments even though VDP is fully funded by employee contributions. VDP deduction is listed in my paystub under Employee Taxes, along with federal withholding, Medicare adn State tax, which I understand indicates that it was paid for by after-tax dollars. I'm trying to see if MetLife will correct the W-2 but it's hard to get a hold of someone there who understands these tax issues. I'm not sure if I should just file the tax return counting it as income and then file an amended return if they issue a corrected W-2, or if it's better to request an extension to file and wait to file.

[MonikaK1]

It is up to you. However, if you decide to file an extension, make a payment based on the assumption that the amount is taxable, so that you won't have interest and late payment penalty if the amount reported as wages determined to be taxable.

@AL248 

[user17744836875]

Hello, 

I'm also in the same boat. What did you end up doing? Do we need to pay CA tax on the short term disability income?

Thank you.  

[MarilynG1]

If you received a W-2 from an insurance company for Disability pay, taxability depends on whether the premiums were paid by you, your employer, or both.  

• 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.

Most likely, income reported in Box 1 of a W-2 received from an insurance company would be taxable.  Your employer should add any taxable disability to their W-2 for you, often with a note/amount  in Box 12 or 14 and the 'third party disability' box checked.

If your W-2 from the insurance company has no amount in Box 1, and only an amount in Box 12/14, with 'third party disability' checked, this indicates it's non-taxable, and only for your records.  In this case, your disability pay (wage replacement) is most likely added to your employers W-2.

Here's more info on Third Party Sick Pay.

@user17744836875 

[user17744836875]

Hi Marilyn, 

Thanks for your reply. The W2 that I received from the third party service company named Matrix has Box a, b, 1, 2, 3, 4, 5, 6, 15 and 16 filled. Also Box 13 has 'Third-party sick pay' checked. And there was no state income tax withheld. Box 17 has $0. So I thought this income was tax free at least at state. 

I don't exactly know if this sick pay is paid by CA SDI or VPDI (for which I paid the insurance). When I asked them, they didn't provide much information, they just asked me to talk to a tax expert. My tax expert informed me that I need to pay tax both to federal and state as Box 1 and 16 has income filled. So I paid along with 2024 tax returns last year. 

But I called the California Franchise Tax Board (FTB) and asked the agent to check the W2, she mentioned that it should be tax free income. So I'm planning to file amendment. Could you please let me know if there will be any situation where Box 1 and 16 would be filled, but it's still tax free income? 

Thank you

[BillM223]

Please see this TurboTax FAQ. It seems like this is for VDPI by an insurance company, although they should be able to tell you that much at least (I understand them not wanting to give you tax information)...but is Matrix an insurance company paying disability? I would hope that they know that much.

When you enter the W-2, on the screen, Let's check for uncommon situations; check the box Paid family leave. This will trigger the California interview to show you a screen titled Paid Family Leave (PFL) Income in California.

The next part is the tricky part. The interview shows you a box with the amount from the W-2. You are supposed to enter the amount of income that is VDPI paid by an insurance company, because whatever you enter here is removed from California taxable income. If you just hit Continue, then the entire W-2 amount will be removed from your CA income, which may not be what you want.

So, to summarize, this W-2's income is taxable on your federal return, but it may or may not be taxable in California depending on whether it's actually disability from an insurance company that was engaged by your employer.