If you were injured on the job or became ill as a result of your workplace, you might be entitled to workers’ compensation benefits. In addition to navigating the complex worker’s compensation claims process, you may have questions about how your benefits will affect your taxes.
In general, workers’ compensation is not taxed at the state or federal level. There are special circumstances to consider, though. In some cases, part of your workers’ compensation could be offset by another benefit that is taxable.
Keep reading for a detailed explanation of workers’ compensation and how this can impact your taxes.
Key Takeaways
- Workers’ compensation benefits aren’t taxable or claimed on yearly tax statements.
- You’ll still receive a W-2 if you earned taxable wages in the same tax year that you received workers’ comp benefits.
- In special circumstances, workers’ comp benefits might be either offset or terminated by another benefit.
- The total amount of benefits you receive can’t exceed 80% of your average earnings you were earning before you became unable to work.
What Is Workers’ Compensation?
Workers’ compensation is a type of insurance paid for by employers. This benefit, if approved, pays a cash benefit for employees that become ill or injured as a result of their job. This payout covers partial wages that were lost due to the inability to work brought on by the injury or illness. In addition, workers’ compensation can pay for medical expenses that are directly related to the injury or illness.
Claims are filed with and processed by the employer’s insurance company. If approved, the claim is paid to the employee. If the insurance carrier determines that there is insufficient evidence to prove that the illness or injury is directly related to the workplace, the claim can be denied, and no benefits will be paid. A denial can be appealed by the employee.
Workers’ compensation claims can take a while to fully process — anywhere from a few weeks to a few years, depending on the nature of the case. If the claim is initially denied but is under further review, the employee might receive disability benefits in the meantime.
If the denial of the workers’ comp claim is then overturned and the claim is approved, workers’ compensation benefits will be paid to the employee, less the amount of disability benefits received.
Some examples of workers’ compensation cases include:
- Repetitive sprains and strains
- Burns
- Contusions
- Fractures
- Eye injuries
- Cumulative trauma
- Electrocution
- Hearing loss
- Stress (under certain circumstances)
- Heart attacks
- Illnesses related to asbestos exposure
While these examples are rather common, they don’t automatically call for approval for a claim. All claims must be subject to review before approval (or denial) can be made.
If you have a case, you likely have some questions. Is workers’ comp taxable, and how does it show up on your 1099 or W-2? We’ll answer these questions later on.
What Jobs Lead to Workers’ Compensation Claims?
While workplace injuries and illnesses can happen anywhere, there are certain jobs and professions that are more likely to have a higher rate of workers’ compensation claims.
These are typically jobs that require repetitive lifting or contact with sick patients. Again, each and every claim for workers’ compensation must be adjudicated, regardless of the industry.
Is Workers’ Comp Taxable?
Taxes are a concern when you receive any type of income. You may be wondering then — is workers’ compensation taxable?
Workers’ compensation benefits aren’t taxable and aren’t reported on yearly tax statements. They are fully exempt from state and federal taxes, regardless if paid on a scheduled basis (like weekly or biweekly) or in a lump sum.
Keep in mind, however, that if you received taxable wages in the same tax year that you received workers’ compensation benefits, you would still receive a W-2 for the taxable income you did receive.
Special Workers’ Comp Circumstances
While workers’ compensation benefits are not taxable, there are special circumstances in which they might be either offset by another benefit or terminated altogether. Those benefits often have different tax treatment.
Social Security Disability Insurance
Depending on certain circumstances, workers’ compensation might be paired with Social Security Disability Insurance (SSDI). SSDI, if approved, pays benefits monthly to employees who are unable to work due to a significant illness or impairment that will either last at least a year or is expected to result in death.
Injured or ill employees may qualify for SSDI benefits if they have worked in jobs that are covered by Social Security and have a qualifying medical condition that meets Social Security’s definition of disability, among other factors. Age, however, is not taken into consideration when determining eligibility. Payment amounts vary based on your average lifetime earnings before the injury or illness began.
It is possible to receive both SSDI benefits and workers’ compensation benefits at the same time. However, the total amount of benefits received can’t exceed 80% of your average earnings before you became unable to work. It’s important to note that it’s the SSDI payment, not the workers’ comp payment, that will be reduced to account for the 80% limit.
Supplemental Security Income
Supplemental Security Income (SSI) is a federal program funded by U.S. Treasury general funds. It provides payments to help those who are disabled, as well as families who have limited income and resources. SSI payments are not taxable, similar to workers’ compensation payments.
To qualify for SSI benefits, someone must meet all of the requirements below:
- Be disabled, blind, or age 65
- Have limited income and resources
- Be a U.S. citizen or national or a lawfully permitted alien meeting additional requirements
- Reside in one of the 50 states or the District of Columbia
Depending on how much your workers’ compensation benefit is, you may or may not be eligible for SSI benefits. Your workers’ compensation benefits are considered income, and therefore will be deducted from the Federal benefit rate that is set each year. To verify if you’re eligible for both benefits, speak with your workers’ compensation administrator.
Light-Duty
What happens if you partially recover from your injury or illness, but can’t go back to working in the same capacity as before? Your employer and doctor might let you go back to work on a light-duty modification.
Light-duty refers to work that is either physically or mentally less demanding than the duties of your previous job.
Light-duty work can be permanent or temporary. Some examples of light-duty work include:
- Transitioning from manual labor to a desk job
- Working remotely versus working from the office
- Working restricted hours
- Modifications to physical tasks, including lifting or bending
- Adjusting the number of hours you stand or sit in one day
- Taking longer or more frequent breaks during the day
- Limited exposure to chemicals or cleaners
- Limited exposure to bright lights
Returning to work on light duty can have an impact on your workers’ compensation payments. If you’ve switched to light-duty and:
- Make the same amount of money or more than pre-injury: your workers’ compensation payments will not continue to be paid
- Make less money before your injury: you will continue to receive partial wages through workers’ compensation
It’s important to note that if you’re receiving both partial wages and partial workers’ comp settlements, your workers’ comp benefits are still not taxable, but the wages that you’re receiving from your job are considered taxable income.
Retirement
Retirement is a long-awaited milestone. This reward for years of hard work shouldn’t be diminished by a workplace injury. The good news is that workers’ compensation and retirement can still work hand in hand.
If you retire while on workers’ compensation, your workers’ comp will still continue to pay for your medical expenses related to the injury or illness. However, Social Security retirement benefits might impact the payment for lost wages.
You might be eligible to continue to receive full workers’ comp pay in addition to Social Security benefits, or in some states, your workers’ comp payments might be reduced by the amount you’re receiving from Social Security.
Remember that Social Security benefits may be taxable if you receive other forms of taxable income from a retirement plan or from a side hustle, even though workers’ comp settlements are not.
Workers’ Compensation FAQ
Below are some commonly asked questions regarding workers’ compensation payments.
Will I Receive a 1099 or W-2 For Workers’ Compensation?
Because workers’ compensation is not taxable, you will not receive a 1099 or W-2 form for any workers’ comp payouts. However, if you’re receiving wages from any light-duty work, disability insurance payments, or Social Security benefits, you will receive the appropriate tax forms.
How Is Workers’ Compensation Paid?
Workers’ compensation benefits can either be paid in structured payments or a lump sum. Typically, depending on the length of time it took to process the claim, you might receive a lump sum at first to make up for any back pay, then any subsequent payments in installments.
How Much Does Workers’ Comp Pay?
Workers’ compensation payment amounts can vary greatly by state. Typically, however, rates are either two-thirds of your average monthly or weekly wages or 80% of average weekly wages, subject to any state maximums.
The question of “Is workers’ comp taxable?” is not as straightforward as it may seem, given the many components that may be used to compensate injured or sick workers. Luckily, TurboTax easily walks you through accurately claiming your income, deductions, and credits.
No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.
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