Disability income for which the employer paid the premiums qualifies as federal taxable income. Every person who receives disability income should submit a Form W-4S to his insurance company asking them to withhold taxes on the taxable income or file a Form 1040-ES.
Depending on the state of residency, disability benefits could also be subject to state taxes. Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) are generally not subject to federal taxes; however, this depends on the total household income. Disability benefits for which the employer paid the premiums other than the SSDI, SSI and military disability benefits also qualify as earned income to claim the Earned Income Tax Credit (EITC). Tax payers can determine their eligibility for claiming the EITC by filing a tax return.