Salary Continuation Plans Funded with
Disability Income Policies

Premiums used to pay for policies covering employees under a salary continuation plan are deductible. If premiums are paid by the employer, the benefits received are taxable income to the employee. Sole proprietors, partners, and greater than two percent shareholders are not considered to be employees; therefore, premiums paid for policies covering them are treated as if they are being purchased individually and are not deductible. Benefits received by such sole proprietors, partners, or greater than two percent shareholders are income tax free.

In "C" corporations, shareholders may also be employees, and premiums paid for policies covering them are deductible, making benefits taxable when received. For the first six months benefits are received during a period of disability, they are subject to Social Security Tax and Unemployment Tax.