Regarding taxes and company *not state or fed* paid disability, is this money taxable in the state of VA?

Question

I receive company paid disability at 66% of my regular salary which is managed by Aetna. When I finally got my claim approved I received four and a half months of payment, with no taxes taken out. I reside in the state of Virginia.

Should I be filing quarterly payments for federal taxes on my company disability payments? Is it considered 'income' for state and federal purposes?

If I AM supposed to be paying taxes on this money isn't it illegal for it to be provided to me without giving me the option to fill out a W-4 form--without a completed form they should have been withholding at the highest rate possible.

Aetna has been completely useless in helping with questions about the taxation situation. I've been setting money aside from this but I really don't have a huge amount of money to give to a tax agent just to tell me what Aetna darn well should already know.

Answer 1

Who paid for the insurance coverage?  If you paid for it with tax-paid dollars, the payments are tax free.  If you paid for it with pre-tax dollars or if your employer paid for it, it's taxed as ordinary income.  If it was split between tax-paid dollars and either pre-tax or employer paid, the benefits are split taxable and non-taxable in the same proportion that the premiums were paid.

If you want taxes withheld, you should simply ask them to do so.  They aren't required to do so in most cases unless you've been flagged for backup withholding by the IRS -- and I'm not sure about the backup withholding provisions as it applies to disability coverage.  If they can't or won't withhold taxes, then you should set aside enough to pay them and make the quarterly estimated payments using Form 1040-ES.

VA will have its own rules; you'll have to check the VA DOR website on that.