Is Temporary Disability Income Taxable in Hawaii?
Unravel the tax implications of temporary disability income in Hawaii, linking taxability to its unique funding model.
Temporary Disability Insurance (TDI) provides financial support to individuals unable to work due to non-work-related illness or injury. For Hawaii residents, understanding the tax implications of these benefits is important. Hawaii’s specific TDI structure often results in favorable tax treatment for recipients.
Taxability of Temporary Disability Insurance Benefits
The taxability of temporary disability benefits, including those from Hawaii’s TDI program, depends on who paid the premiums. If an individual pays the entire cost of the premiums with after-tax dollars, the benefits are not taxable income for federal or state purposes. Conversely, if an employer pays all premiums, any benefits received are taxable income, as these payments replace regular wages.
When premiums are shared, the portion of benefits from employer contributions is taxable, while the portion from employee after-tax contributions is not. Hawaii’s TDI program is primarily funded by employee contributions through payroll deductions. Because employees contribute using after-tax earnings, the benefits they receive from the Hawaii TDI program are generally not subject to federal or state income taxes.
Reporting Temporary Disability Insurance for Tax Purposes
Since Hawaii TDI benefits are generally non-taxable due to their employee-funded nature, they typically do not need to be reported as taxable income on federal or state tax returns. This simplifies the tax filing process for many individuals receiving these benefits. However, it is important for recipients to understand the circumstances under which reporting might be necessary or advisable.
In situations where a portion of the TDI premium was paid by an employer, or if the benefits are considered a substitute for taxable unemployment benefits, a portion of the benefits might become taxable. If any taxable amount is identified, the benefits might be reported on a Form 1099-G, Certain Government Payments, issued by a state agency, or potentially on a Form W-2 if a third-party payer is involved.
If a Form 1099-G is received, it would typically show the taxable amount in Box 1. If the benefits are taxable and reported on a Form W-2 as sick pay, they are generally reported as wages. If an individual receives a Form 1099-G or W-2 for TDI benefits that they believe are non-taxable, they should review the details carefully. It is possible that only a portion is taxable, or that the form was issued in error regarding taxability. If clarification is needed, contacting the issuing agency or a tax professional can help ensure accurate reporting.
Hawaii’s Temporary Disability Insurance Structure
Hawaii’s Temporary Disability Insurance law, enacted in 1969, mandates that most employers provide TDI coverage for their employees. This ensures that eligible workers receive partial wage replacement if they become disabled due to a non-work-related injury or illness, including pregnancy.
The state itself does not administer the benefits directly; instead, employers are required to secure coverage through approved private insurance plans or self-insurance. The funding mechanism for Hawaii’s TDI program is a significant factor in its tax treatment. Employers have the option to pay the entire cost of the TDI coverage or share the expense with their employees.
If employers choose to share the cost, they can deduct up to 0.5% of an employee’s weekly wages for TDI contributions, with a maximum weekly deduction amount that is adjusted annually. For example, the maximum weekly employee deduction was $7.21 in 2025. This mandatory employee contribution, made with after-tax dollars, directly supports the general non-taxable status of the TDI benefits received.
When the employee is the primary contributor to the premium from their already-taxed income, the subsequent benefits are not subject to further taxation. The employer is responsible for covering any remaining premium costs beyond the employee’s allowable contribution. This unique structure ensures that a significant portion of the financial burden for temporary disability is borne by employees, aligning with the tax rules that favor non-taxability for employee-funded benefits.