Disability Insurance – Secure Tax Free Benefits
Long term disability benefit payments are typically tax free when you, not your employer, pay the premiums. Even if you pay with after-tax dollars via payroll withholding from your own salary, you are considered to pay the premiums with your own money.
The same treatment applies if you are an employee of your own closely held C corporation.
Note: While benefit payments would be tax free, the premiums are nondeductible. (IRC Sections 104(a)(3) and 262(a); Reg 1.104-1(d); IRS Revenue Rulings 75-499, 81-192, and 81-193)
If your employer pays for your LTD premium as a tax-free benefit, those premiums would be tax free to you. However, the actual benefit payments would be taxable income to you if you become disabled.