Employer-Paid

• An employer is allowed to deduct fringe benefits to employees, and disability coverage is considered a fringe benefit by the IRS. Premiums are deductible by the employer as a business expense while they pay the bill for insurance coverage. Because he didn't pay for the insurance, an employee cannot write off premium payments on their tax return.
  
  

Employee-Paid

• Employees may often choose whether to use pre-tax or after-tax dollars to purchase disability insurance. Although neither of these will allow the employee to deduct premiums on their tax return, there are significant tax implications. An employee using pre-tax dollars will lower their overall income in the year of purchase by the amount of the premium. If they become disabled, benefits will be taxable. Employees who choose to use after-tax premiums will have premium payment amounts added to their income but receive tax-free benefits when disabled.
  
  

Shared Cost

• When the employee and employer share costs, the portion paid by the employer may be deducted as a fringe benefit by the company. The portion paid by the employee is not deductible on a tax return, although the employee may choose whether to use pre-tax or after-tax dollars to pay their portion of the premium. Using pre-tax dollars lowers the employee's income reported on the tax return, achieving a benefit similar to a deduction. Any portion of the premium paid with pre-tax dollars translates to an equal portion of taxable benefit when you file a claim.
  
  

Self-Employed

• You cannot deduct insurance that covers the loss of income due to prolonged illness or disability. However, you can deduct the cost of insurance premiums which cover the overhead costs to keep your business operating while you're disabled. Benefits paid from disability insurance, which cover the loss of income, are tax-free.