Are Long Term Disability Payments Subject to FICA?
FICA tax on disability pay follows unique rules separate from income tax. Learn how timing determines your liability for this temporary tax obligation.
Long-term disability (LTD) payments provide income for employees who are unable to work due to a significant illness or injury. Separately, the Federal Insurance Contributions Act (FICA) mandates taxes for Social Security and Medicare. The question of whether LTD benefits are subject to FICA tax depends on a combination of timing and how the insurance premiums were paid.
The General Rule for FICA on Disability Payments
For FICA purposes, long-term disability payments are treated as wages for a limited time, governed by the “six-month rule.” According to this rule, LTD payments are subject to both Social Security and Medicare taxes for the remainder of the calendar month in which the employee last worked, plus the following six consecutive calendar months. After this period concludes, the disability payments are no longer considered wages for FICA purposes and are exempt from these taxes.
This rule applies regardless of when the disability payments actually begin, which can sometimes be months after the last day of work. The clock starts based on the employee’s last day of active employment. For example, if an employee’s final day at work is May 15, 2024, the disability benefits they receive would be subject to FICA taxes through the end of November 2024. This covers the rest of May plus the six full months from June through November.
Once this window closes, the payments are no longer subject to the 6.2% Social Security tax or the 1.45% Medicare tax for either the employee or the employer. This exemption continues for as long as the individual receives benefits under that disability claim.
Impact of Premium Payments on FICA Liability
The way in which LTD insurance premiums are paid directly influences the tax treatment of the benefits, but it interacts differently with income tax versus FICA tax. When an employer pays the premiums for the disability policy and does not include that cost as part of the employee’s gross income, the arrangement is funded with pre-tax dollars. Consequently, any disability benefits received are subject to federal income tax. These benefits are also subject to FICA taxes during the initial six-month period.
A different scenario unfolds when an employee pays the LTD premiums using their own after-tax dollars. In this situation, the disability benefits received are excluded from the employee’s gross income, meaning they are not subject to federal income tax. This is a common point of confusion, as many assume this also exempts the payments from FICA.
Even when benefits are free from income tax due to being funded with after-tax employee contributions, they remain subject to FICA taxes during the defined six-month period.
FICA Tax Withholding and Reporting
The responsibility for withholding and remitting FICA taxes on disability payments depends on who administers the payments. If the employer pays the benefits directly from its own assets, it is responsible for withholding the employee’s share of FICA taxes, paying the employer’s matching share, and remitting both to the IRS.
More commonly, payments are made by a third-party insurance carrier. In these cases, the third-party payer is responsible for withholding the employee’s portion of FICA taxes (7.65%) from the benefit checks during the taxable period.
Even when a third party handles the payments and the employee’s withholding, the employer remains legally responsible for paying the employer’s matching share of FICA taxes for the same period. The insurer will typically notify the employer of the payments made so the employer can calculate and remit its portion of the tax.
These transactions are documented on the employee’s Form W-2 for the year. Taxable disability pay subject to FICA will be included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips). The FICA taxes withheld will appear in Box 4 (Social Security tax withheld) and Box 6 (Medicare tax withheld). If benefits are not taxable for income tax purposes but are still subject to FICA, the income might be reported in Box 12 with Code J, which designates nontaxable sick pay.