receive $1249 per month for 14 years, or until Joe is 65 years old. Once Joe turns 65, his social security benefits would begin.1
Even though these benefits are coming from the government, that doesn’t mean that they are guaranteed to be tax-free. They may be tax-free, but they may not be. For the preceding example, it’s likely that Joe’s benefits would be tax-free. But assuming that he did have to pay federal income tax, and if Joe falls in the 15-percent tax bracket, the nontaxable (gross) equivalent of his social security ben- efits would be $2693 per month ($32,316 per year). That falls quite short of his $40,000-per-year gross salary.
How does that sound as a sole form of benefits? Most people I know don’t want to wait five months to collect benefits, nor do they wish to tap into their savings to help cover those five months. The benefits don’t begin to cover what a worker would normally bring home in pay, plus they may also be taxable. Relying on Social Secu- rity benefits in the case of a disability is not a financially responsi- ble, or wise, decision.
DI as Part of a Worker’s Benefits As part of an employee’s benefits package, many employers will include some sort of disability insurance, which is paid for entirely by the employer. This is not only a benefit for the employee, but, if used, will also cause the employee to face some tax consequences that may not have been considered. Employer-sponsored DI plans are a benefit for the employer, as well, because they provide the employer with another tax deduction. An employee may receive short-term DI, long-term DI, or both from his or her employer.
The biggest benefit to an employer-sponsored DI plan is that employees don’t have to pay for their own insurance. Plus, the amount that the employer pays for the insurance is not included in the employee’s gross income. So, not only does the employee not have to pay for the coverage, but he or she is also not taxed on the premium amount. Of course, if the coverage is used, this may come back to
1 The figures used in the example are merely illustrative and aren’t meant to convey what actual social security benefits would be. Those are determined on a case-by-case basis by the Social Security Administration. You can also visit their Web site at www.ssa.gov to receive an approximation of what your benefits would be.