- Have a Tax Question?
If you received disability payments while you were out of work due to illness, injury, or pregnancy, you may hear the term “third-party disability pay.” For many New Jersey residents, this includes payments from New Jersey Temporary Disability Insurance (TDI) or an approved private disability plan.
While these benefits are incredibly helpful when you need them most, they can also raise questions at tax time. Our goal is to help you understand what these payments are, how they’re reported, and what they may mean for your tax return — without confusion or surprises.
Third-party disability pay refers to wage replacement benefits paid by someone other than your employer, such as:
The State of New Jersey (Temporary Disability Insurance)
A private disability insurance carrier
An employer-provided disability plan administered by an outside insurer
Even though these payments may not come directly from your employer’s payroll, they can still have tax reporting requirements.
New Jersey’s Temporary Disability Insurance program provides partial income replacement when you are unable to work due to a non-work-related medical condition.
Because these payments are issued through the state or a third-party insurer, they are commonly classified as third-party sick or disability pay for tax purposes.
This classification affects:
How the income is reported
Whether a W-2 is issued
How the income should be included on your tax return
In many cases, yes — but how it’s taxed depends on the situation.
Factors that matter include:
Who paid the benefit (state vs. private plan)
Whether employee or employer contributions funded the plan
How the payment is reported on your tax documents
Some disability income is taxable at the federal level, while other portions may not be. New Jersey state tax treatment can also differ. This is why proper reporting is important.
Third-party disability pay often causes confusion because:
Payments may arrive without taxes withheld
W-2 forms may look different than regular wage statements
Income may be reported separately from your regular paycheck
This doesn’t mean anything is wrong — it simply means the income needs to be handled correctly when your return is prepared.
We review disability payments carefully to ensure:
Income is reported accurately
Tax treatment aligns with current rules
Your return reflects the correct taxable amount
You’re not overpaying or underreporting by mistake
If you received disability benefits during the year, we’ll walk through it with you and explain how it impacts your return in clear, straightforward terms.
If you’re unsure whether the disability income you received needs to be reported — or how it affects your taxes — we’re here to help.
Understanding this ahead of time can prevent delays, notices, or unexpected balances later.
This content is maintained and reviewed by licensed tax professionals with extensive experience handling New Jersey disability income and wage replacement benefits.