Is Workers' Compensation Taxable?

Is Workers' Compensation taxable? No matter what level of taxation you consider – whether it’s local taxes, state taxes, or federal taxes – in the vast majority of cases workers’ compensation benefits are not taxable income.

That is good news to hear when you are unfortunate enough to get injured on the job and be unable to work.

It is hard enough to get hurt while working and then be forced to stay home or work in a limited capacity. The last thing you want is to have to pay taxes to the Internal Revenue Service on your benefits as well.

"There are some possible exceptions to the above information – such as if you are getting Social Security or railroad retirement benefits and workers’ comp benefits – but for most people taxes are not a concern. You can probably do your tax return like you always have." – Terry Katz, Esq., New York Workers' Compensation Lawyer

If you or a loved one has been hurt on the job and needs to get workers’ comp benefits, we want you to know that we are here to help. We know how frustrating it can be to be an injured worker – and particularly if your benefits are denied or your claim is not enough to cover your bills.

Our New York workers’ compensation lawyers are serious about getting you the help you need and we will fight hard to make sure your voice is heard.

Contact the Long Island workers’ comp law firm of Terry Katz & Associates today at (516) 997-0997 to get a free consultation.

Are Workers’ Compensation Benefits Taxed?

For most people, workers’ comp benefits are not subject to taxation. There is actually a specific document produced by the IRS that covers this subject, called IRS Publication 17.

IRS Publication 17 States:

“Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they’re paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors.

The exemption, however, doesn’t apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable.

For more information, see Pub. 915, Social Security and Equivalent Railroad Retirement Benefits.” - Internal Revenue Service

Lump sum payments are also not taxable by the IRS, so if you get a lump sum payment you should not have to pay income tax on it, either.

Although the wording can sometimes be a little dense, in summary, the publication states that you don’t have to worry about paying tax on your workers’ comp benefits. If you happen to be one of the few benefit recipients who are getting retirement benefits as well – such as benefits from railroad work – you may need to look more closely at what your tax obligations may or may not be.

You may also need to consider tax issues if you are getting social security benefits. You can discuss your situation with an NYC workers’ compensation lawyer, a tax specialist, or both, to find out exactly how the tax system will treat your situation.

Taxes Will Resume When You Go Back to Work

You probably expect to be subject to taxes when you go back to work, but it is worth mentioning that once you go back to work – even if you are just performing light duty due to your current injuries – you are going to be taxed on your income.

You need to keep this in mind because it can come as quite a shock to go for a long period without paying taxes on your benefits and then be hit with a tax bill.

Your paycheck for your newly resumed work duties will be short the taxes that you arranged to pay with your employer when you filled out your deductions after getting hired, so be prepared.

Combining Workers’ Compensation Benefits and Social Security Disability Benefits

If you get workers’ compensation benefits and you are also getting Social Security disability insurance (SSDI) or you are getting Supplemental Security Income (SSI), you may find yourself in a situation where the IRS expects you to pay some taxes.

But the Social Security Administration (SSA) might be able to structure your benefits so that when they are all combined, they still stay below a specific threshold that works to your benefit. If the SSA cannot structure your benefits in such a way that you are able to minimize your taxes, a workers’ compensation attorney can definitely help you figure out how to minimize your tax obligations.

One thing that often happens with individuals who are receiving multiple benefits, including workers’ comp and some type of benefit from the SSA like SSDI, is that their taxable income remains low enough that they don’t owe taxes regardless.

Even if they do owe taxes they are very low, so low they don’t make much of a difference in the individual’s overall income.

Managing Workers’ Comp Benefits to Your Advantage

The fact that you are in need of workers’ comp benefits in the first place means that you are facing a tough situation. You deserve every break you can get. That is why we encourage you to speak to one of our Workers’ Comp attorneys about your situation so that we can offer informed guidance concerning your specific situation.

You may not be getting the benefits that you know you deserve. You may be wondering if you can file a personal injury lawsuit even though you want to get workers’ comp. All of these are normal, smart questions to be asking. We are here to answer them.

Contact Terry Katz & Associates right now at (516) 997-0997 if you are an injured worker.

Let our Long Island Workers’ Comp Lawyers ensure you are treated right and that your taxes are kept to a minimum.

Get a free consultation now!