Is Work Comp Taxable?
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As a writer and research for over two decades, Tom Senkus shares his expertise on such topics as financial planning, insurance, telecommunications, and more. His work has been featured in over 150 publications.
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Paul Martin is the Director of Education and Development for Myron Steves, one of the largest, most respected insurance wholesalers in the southern U.S.
Workers' comp is designed to help injured workers replace income and recover from injuries\illnesses without incurring financial hardship. Depending on the severity of the injury, a worker may receive benefits for a short time, several years, or even for the remainder of their life.
However, one common question that many people have about workers’ comp benefits is whether they are tax-exempt.
Table of Contents
In this article, we’ll take a look at four common questions asked about workers' comp and how taxes apply for employers and injured workers, including:
Is workers’ comp tax-deductible for employers?
Are workers' compensation benefits taxable for injured employees?
What are the types of workers' comp benefits for injured workers?
If workers' compensation does not cover an injury, what will?
Because of the complicated nature of taxes and workers' comp, speaking with a financial professional can give you a clear understanding of your tax liability, money-saving tips, and more. Consider speaking with an independent insurance agent today to gain peace of mind and a more secure future.
Is workers’ comp tax-deductible for employers?
Yes, workers' comp payments and benefits that employers pay to their employees are deductible business expenses. Business owners are able to deduct the costs of required insurance payments from their tax liability if they are necessary for their business operations.
According to the federal tax code detailed by the IRS, incidental insurance payments are deductible expenses for employers. These are defined as costs incurred in the ordinary course of business, where business owners are able to deduct the cost of their workers' compensation insurance payments on their Schedule C, Profit or Loss. Additionally, businesses that self-insure through private insurers or a third parties are also eligible to deduct premiums and related expenses from their taxes, such as funeral benefits paid to a deceased worker’s family.
Are workers' compensation benefits taxable for injured employees?
Generally speaking, workers’ comp benefits aren’t taxable at the state or federal levels for employees. However, there are a few notable exceptions where you may have to pay some taxes.
Exclusion from Income
First, understand that most of those receiving workers' compensation benefits can exclude these payments from their annual tax returns. But they may not deduct them. However, an employee who retires from their job because of a debilitating and permanent injury is not able to deduct retirement pension payments or exclude their retirement benefits.
Continue to Work
If an injured employee continues to work modified or light-duty shifts while receiving reduced weekly benefits, workers' compensation benefits are treated as taxable income. According to the IRS, these payments are not considered excluded benefits, but rather a continuation of paid wages and therefore the worker must pay income taxes on their wages.
Collecting Social Security and Workers’ Comp Benefits
It is possible for individuals to receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) at the same time they're receiving workers’ comp benefits.
In these cases, part of their workers’ comp benefits may get reduced and be taxed in what’s known as a “workers' compensation offset.”
As an example, if a worker suffers a permanent injury while on the job, they may receive workers’ comp disability benefits for life, as well as receiving SSDI concurrently. To counteract overpayment and ensure that disability payments remain below a certain threshold, the offset may take effect. Therefore, if the monthly SSDI check is reduced by $300 due to the workers' compensation offset, then $300 of the workers' comp payments are taxable.
This may seem unfair, but this offset is mainly geared towards those who earned more in wages than most. Considering that most people who receive SSDI/SSI and workers' comp benefits usually don't have enough taxable income to owe federal taxes, it's likely that those people will owe no taxes.
Understand Your Tax Liability
Bear in mind that each state has different guidelines and regulations for their workers’ compensation programs. Therefore, it should be a priority to research your state’s laws and regulations regarding workers' comp taxation. To help you understand the process and how to avoid paying more taxes than is reasonable, an independent insurance agent can help. By comparing your options and outcomes, you can maximize payments that are owed to you due to a workplace injury.
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What are the types of workers' comp benefits for injured workers?
The severity and permanence of a worker's injury determine the extent to which they’ll receive appropriate benefits in:
- A lump-sum payment
- Weekly payments
- Or, less commonly, a structured settlement
After an injury occurs and a claim is approved, one of the following four classifications of benefits will be offered to an injured individual:
| Temporary Partial Disability (TPD) | Injuries that fall under this category typically reward workers who can maintain some capacity for employment. TPD basically compensates workers for the difference between their previous wages and their current reduced wages. |
| Temporary Total Disability (TTD) | Injuries that are designated as TTD, which prevents a worker from performing any work duties, can expect to receive 2/3 of their income while they recover. However, many states offer benefits up to a certain cap or time. After this period elapses, benefits may end until further medical examinations are performed on the injured party to determine their current and expected disability status. |
| Permanent Partial Disability (PPD) | Injuries that are serious enough that an injured worker permanently loses the use of their body will be covered under permanent partial disability. This designation is for workers who can only do a limited amount of work after their injury. Depending on the state where they are employed or reside, the maximum amount they can expect to receive can vary depending on various factors, such as future employability, available vocational training, and more. |
| Permanent Total Disability (PTD) | If an injury is such that it prevents a worker from working at all in the future, they may be able to get 2/3 of their weekly earnings for the rest of their life. |
State-Specific Benefits
Most injured employees can receive the following kinds of benefits via a workers’ compensation claim in most states:
- Weekly compensation, often 2/3 of an employee’s weekly income
- Payment of medical bills
- Compensation for medical devices, therapy, treatment, and medications
- Permanent impairment benefits
- Vocational rehabilitation
If workers' compensation does not cover an injury, what will?
The average settlement amount for a workers’ comp-related injury is $21,800. Considering that injuries may last for years after an incident on the job, this amount may not be enough to cover standard of living costs, lost wages, and more.
Having insurance policies set up before an injury occurs is a smart decision to offset any potential catastrophes. An independent insurance agent can guide you through all of the possible policies and investment vehicles that can safeguard your retirement, your health, and your family’s well-being.
By investing in an annuity, you can avoid paying taxes while growing income that can later be used for regular payments, large withdrawals for medical expenses, or providing death benefits if the policyholder should pass away. Or a long-term care insurance policy can be used to offset potential medical needs in the future when the policyholder is unable to care for themselves.
Benefits of an Independent Insurance Agent
Independent insurance agents have access to multiple insurance companies, ultimately finding you the best coverage, accessibility and competitive pricing while working for you. Find an independent insurance agent in your community here.
https://injury.findlaw.com/workers-compensation/are-workers-compensation-benefits-taxable.html
https://www.thehartford.com/workers-compensation/taxable