Reporting Disability Income
Employers may report disability income on one of the following forms:
If both the taxpayer and the employer pay for a disability insurance plan, only the amount the taxpayer receives because of the employer's payments is taxable as income. The taxpayer's employer should be able to give specific details about the pension plan and the amount the taxpayer paid for the disability pension.
If the taxpayer:
If Form 1099-R, box 7, indicates a distribution code 3, and the taxpayer is on disability but under retirement age, check the box stating the taxpayer is disabled. The tax software will place the amount on Form 1040, line 7, Wages, rather than the pension line.
Some employers report disability income on Form 1099-R regardless of the taxpayer's age. If Form 1099-R, box 7, indicates a distribution code of 3, it is a disability distribution. You must confirm employers' minimum retirement age. If the taxpayer is under the retirement age, the volunteer must take steps in the software to ensure the income is properly reflected as wages on Form 1040, line 7.