Why are my DI benefits included as taxable compensation?
According to the IRS, DI [Disability Income] benefits that are considered a substitute for UI [Unemployment Insurance] are taxable. Federal Tax Regulation Section 1.85-1 states that DI benefits are considered to be in the nature of UI benefits when paid to an unemployed taxpayer who is ineligible for UI benefits solely because of the disability.
Your DI benefits are taxable only if you receive DI benefits in place of Unemployment Insurance (UI) benefits. In this case, your DI benefits are considered a substitution for your UI benefits, which are taxable. Learn More ⇒edd.ca.gov/
If you leave work because of a disability and receive disability benefits, those benefits are not taxable. However, if you are receiving unemployment benefits, become disabled, and begin receiving disability benefits; those DI benefits are considered a substitute for UI and are taxable up to your UI maximum benefit amount. Learn More ⇒ edd.ca.gov/