Is Workers Comp Taxable?

Getting hurt on the job can be financially worrisome. Injured workers must deal with the stress of recovering from an injury or illness, and possibly coping with permanent disability. In addition, even with workers’ compensation insurance, it is unlikely that individuals are bringing home 100% of the salary they previously earned.

Is Workers’ Comp Taxable?

In terms of federal income tax, workers’ compensation awarded under a worker’s comp act or statute due to a work-related injury or sickness is fully exempt from tax. Payments to survivors under the same circumstances are also exempt.

Workers’ comp is in the same category of non-taxable income as:

  • Payments from the public welfare fund
  • Compensatory damages for physical injury or sickness
  • Disability benefits under a no fault car insurance policy for loss of income or earnings capacity due to the extent of injuries
  • Compensation for permanent loss or function of loss for part of the body, or for permanent disfigurement.

The lone exception to this is when an individual also receives disability benefits through the Social Security disability insurance or Supplemental Security Income. In some cases, the Social Security Administration may limit a person’s disability insurance or supplemental payments so that the combined amount of the worker’s comp benefits and disability payments remain below a specific number.

To figure out the taxable portion with this exception, individuals should be aware that it is the same amount by which the Social Security Administration reduces the disability payments. For example, if disability insurance is reduced by $100 due to the workers’ comp offset, then $100 of the workers’ comp payment is taxable.

An experienced workers’ compensation attorney may be able to assist in structuring workers’ comp settlements in a manner that reduces taxable income. If you or a loved one has been injured on the job, call 1-800-THE-LAW2 for a free consultation with a workers’ comp lawyer to ensure all your medical needs are being met, and to ensure you pay as little taxes on your workers’ comp insurance as possible.