Is Workers Comp Taxable?Here's What You Need to know!

Denise Elizabeth P
Senior Financial Editor & Contributor

Nobody loves preparing their income taxes.  It’s a stressful time of year for most people. Today we’ll be discussing and diving into the tense subject of workers compensation, but more precisely, is Works Comp Taxable?

There are deadlines for when you need to file your taxes, lots of important information to dig through and keep track of, lots of room for error, so it’s no wonder that it’s a stressful time.

But it’s even more stressful when you aren’t sure what to do!

If someone’s only income is from their job, and they get a simple tax form, and they don’t have any additional investments, then it can be pretty straightforward to do their taxes.

But once you start adding in other variables then it’s easy to run into issues.

For example, if you have certain benefits or income that you’ve received and you aren’t sure how to claim them, or if you need to claim them at all, this can create obstacles, it can increase stress levels, and it can also increase the odds of an error on the tax return.

One area that can be particularly confusing is when someone has to take time off from their job and is receiving payments from some form of benefits, insurance, and so on.

This can muddy the waters in an otherwise straightforward tax return, so here’s some helpful information.

Worker’s compensation is essentially a type of insurance.

The employee gives up their ability to sue the employer under certain circumstances, and in return, the employee receives compensation if they are injured at work.

The compensation exists to help replace the wages they’re going to miss out on and to help with medical costs that are associated with the injury.

Disease, illness, and injuries are common reasons someone will get payments from workers compensation.

It’s really helpful when you can’t work and you have some money coming in, but what happens once tax time rolls around?

is workers comp taxable in 2023

 

Is Workers Comp Taxable in 2023?

No, Workers comp is Not Taxable.

Generally speaking, you will not be taxed on payments that you receive from workers compensation in your state.

Even though worker’s compensation programs can vary from state to state, the income isn’t taxable.

The requirements for worker’s comp will depend on where you live, and each state has their own office that is responsible for paying out workers compensation benefits.

There is, however, an exception to the rule that workers compensation payments aren’t taxable as income.

In most cases, money that you receive from workers compensation is not taxable income and you won’t have to pay income tax on it.

It won’t count towards your income for the year, even though it’s money that entered your account.

But as with most rules, there’s often an exception or two that make it necessary to include some caveats instead of making a general blanket statement.

One exception to keep in mind is that if you retire due to an injury or sickness that is occupational in nature, or if your worker’s compensation payments reduce your social security retirement benefits (or railroad retirement benefits), then those retirement benefits are taxable.

We’ll discuss how one type of benefits can offset another type of benefits, and even though you aren’t necessarily paying taxes on the workers comp benefits, they still play a role in how you’re taxed so it’s worth considering nonetheless.

So, you don’t usually need to pay taxes on, or claim, workers comp benefit payments, however if either of the conditions above applies, you could be in a different situation.

Other situations where you may need to include payments from workers comp on your tax filings to the IRS are as follows:

  • If you received workers comp payments as the result of an injury that also results in being on disability or is career-ending, or if you have previously used tax deductions for medical expenses that are related to the injury.

Every worker’s comp case and tax return is different, so if you’re unsure then it’s a good idea to pick up the phone and call the IRS.

They have agents who know all of the ins and outs, and will let you know exactly what you need to do based on your unique situation.

It’s nothing they haven’t seen before, and they’re well-trained on all sorts of situations and how to navigate them.

Alternatively, you could speak to a tax specialist outside of the IRS who will be able to offer you guidance.

It’s free to reach out to the IRS for guidance, whereas a professional will charge you money, but some people feel more comfortable working with a professional that they’ve hired to advise them on their taxes, as opposed to getting support from the IRS.

At the end of the day, what the IRS says is what goes, so getting this information from them can save you some time and money.

The IRS isn’t necessarily working in your best interest, but that doesn’t change the rules or guidelines they have, at the end of the day.

What About Workers Comp + Social Security Disability? Is There an Offset?

The following tidbit of information applies to many states in the USA, but not necessarily all of them, so this is something to keep in consideration if the following scenario applies to you.

In some cases, an individual may be receiving payments of eligible benefits from SSDI (Social Security Disability Insurance), along with benefits payments from workers compensation.

If the sum of those combined benefits is greater than 80% of the average earnings (before the injury/disability), then the benefits received from SSDI will be lowered.

That’s called an offset of the benefits.

In the case of retirement benefits paid via social security, this offset isn’t applicable.

How to Claim Workers Compensation on Taxes

is workers comp taxable

You don’t need to claim workers compensation on your yearly income tax return, so this isn’t something that you need to worry about.

In the event of an offset as outlined above, your workers comp benefits will be offset with the social security payment so it can have implications on how the social security money is taxed.

This is an example of one of the nuanced situations that act as caveats to the general rule of thumb that workers comp benefits are not taxed.

If your situation falls into one of the more complicated categories, it’s a wise idea to contact a tax attorney or another tax professional who can go over things for you, if you’re not comfortable doing it yourself.

To reiterate, the IRS can also offer guidance either in the form of information on their website, or by reaching out to speak with them.

The IRS wants to help you pay the correct amount that you owe for your taxes.

If you reach out outside of tax-season, you should have an easier time getting a hold of somebody when they’re less busy.

How To Apply for Worker’s Compensation Benefits

If you’re injured on the job (whether you work for a private employer, or the state/local government), then you should reach out to your state’s workers’ compensation board.

This is the office that is responsible for helping guide you through the process of applying for benefits, and generally navigating through the process.

You will apply for benefits, they will look at your application, and they will determine if you are eligible to receive compensation for your work-related injury or illness.

Your worker’s compensation claim will need to be backed-up by supporting documents, but the requirements will vary from state to state and depending on the specific nature of the injury or the purpose of your claim.

Your local office can help you to navigate the process.

Final Thoughts on Paying Taxes on Workers Comp Benefits

In any regular situation, you won’t need to pay taxes on your workers compensation benefits and it’s quite straightforward.

Most of the information on this page applies to the special situations or the fridge cases that fall into a very narrow category, for example when there’s an offset between the workers comp and social security benefits.

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  1. Internal Revenue Service "Section 1. Workers Compensation Program" Page 1 . November 4, 2022