Is workers’ comp taxable income?
If you’re hurt at work, workers’ compensation can help cover your medical bills, some of your lost wages, job retraining, and even payments for permanent disability.
Generally speaking, workers’ compensation benefits aren’t taxable. Both the federal government and most states usually don’t tax these benefits.
However, things can get a little tricky when you’re also receiving other benefits, like Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). So, let’s take a closer look at when workers’ comp becomes taxable.
How workers’ compensation benefits work
Workers’ compensation is meant to help employees who’ve been hurt on the job. It can cover a range of benefits, including:
- Medical expenses. Workers’ comp can pay for the costs of treating your work-related injury.
- Lost wages. If you can’t work because of your injury, workers’ comp can help make up for the wages you’ve lost.
- Job retraining. Workers’ comp may help you get new skills so you can find a different job if you’re unable to return to your old one.
- Permanent disability. If your injury causes a permanent impairment, workers’ comp may provide compensation.
State-specific regulations
It’s important to know that workers’ compensation laws can differ quite a bit from one state to the next. Be sure to do some research to learn about the specific regulations in your state.
The General Rule: Workers’ Compensation Benefits Are Usually Not Taxable
Here’s some good news: in most cases, the payments you receive through workers’ compensation are exempt from federal income tax.
The majority of states follow the federal lead, which means your workers’ comp benefits probably won’t be taxed at the state level, either.
The reason for this exemption is simple. Workers’ compensation is meant to help injured employees recover, and adding a tax burden would undermine that goal.
Exceptions: How workers’ comp can affect Social Security
There are some cases where receiving workers’ compensation may affect your tax situation, particularly if you also receive Social Security benefits.
Social Security Disability Insurance (SSDI)
If you’re getting both workers’ compensation and Social Security Disability Insurance (SSDI) benefits, your SSDI payment may be reduced. SSDI is taxable, so this can affect your overall tax burden.
Supplemental Security Income (SSI)
Workers’ compensation payments can also reduce the amount you receive from Supplemental Security Income (SSI). However, SSI benefits are generally not taxable.
Here’s how it might work
Imagine you’re receiving both workers’ compensation and SSDI. Because SSDI is taxable, and your SSDI benefits might be reduced because you’re also receiving workers’ comp, you could end up owing more in taxes than you would have if you were only receiving one type of benefit.
Is Workers’ Comp Tax Deductible?
This is where it gets a little tricky. The rules are different depending on whether you’re an employer or an employee.
- Employers: The IRS generally allows businesses to deduct workers’ compensation insurance premiums and any payments they make as business expenses. This is an important factor to consider when planning your business finances.
- Employees: As an employee, you can’t deduct any workers’ compensation benefits you receive on your tax return. The assumption is you never paid taxes on this money, so you don’t get to deduct it.
In Closing
Sorting out the financial implications of a workplace injury can be confusing, so it’s always a good idea to consult with a tax professional or accountant to get personalized advice.
If you’re dealing with a complicated workers’ compensation claim, you may also want to seek legal counsel from a work injury lawyer.
While workers’ comp benefits are usually not taxable, the way they interact with other benefits means it’s important to get sound professional guidance to protect your interests.