In "C" corporations, shareholders may also be employees. Therefore, premiums paid for policies covering them are deductible, making benefits taxable when received. The employee should own the policy, and the corporation should pay the premiums. Naming the corporation both premium payor and policyholder is usually not permitted with individual disability income policies, since this ownership arrangement can cause overinsurance problems and result in the loss of the tax deduction for the premium. Business overhead expense and buy-sell policies are often owned and paid for by the business.

Benefits received during the first six months of disability are subject to FICA tax withholding. Under IRC Sec. 22, a limited credit may be available to permanent and totally disabled individuals under age 65, as long as the premiums are employer-paid and do not show up on the employee's W-2 form.

With the growing concern over errors and omissions liability, it makes sense to learn the rules. Therefore, you should be sure you and your clients understand the tax considerations involved in all disability premium and benefit decisions.

See Ohio National's brochure, "Do You Want To Pay Income Tax Twice?" Mailer (Form 8812) Rev. 5/08.