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Are Workers Comp Benefits Taxable Income?

Are Workers Comp Benefits Taxable Income?

Workers’ compensation benefits are not considered taxable income at the federal, state, and local levels. Workers’ comp benefits are non-taxable insurance settlements. While a worker does need to report these benefits on New York tax form W-2 (Wage and Tax Statements), the amount awarded by the New York State Workers’ Compensation Board is excluded from the gross pay for a work-related injury.

Individuals do not have to pay income taxes on workers’ compensation benefits, according to IRS Publication 907. The Internal Revenue Service (IRS) states: “The following payments are not taxable…Workers’ compensation for an occupational sickness or injury if paid under a workers’ compensation act or similar law.”

The IRS confirms that workers compensation benefits are not taxable income in IRS Publication 17. It says “Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.

IRS Publication 17 also says that “The exemption also applies to your survivors,” confirming that workers’ compensation death benefits are non-taxable, as well.

Lump sum settlements are also not taxable.

Workers’ comp was designed to provide financial compensation and medical benefits to workers who are injured in work-related accidents. The tax code was written with the knowledge that the seriousness of work-related injuries deserves more than just medical attention. Even though a worker is hurt and unable to work, bills still have to be paid. In New York, workers’ compensation is two-thirds of a regular weekly wage times the % of disability. A worker needs that compensation, so it helps that taxes are not taken out of that pay. Workers’ compensation is protection in case of a workplace injury.

Note that, according to IRS Publication 17, tax exemption does not apply to any retirement plan benefits that are received based on age, length of service, or prior contributions to the plan. This includes retirement because of an occupational sickness or injury.

The salary received by a worker who returns to work is taxable as wages, even if light duties are being performed.

There also may be times when receiving workers’ comp benefits does lead to a tax. When a person receives both Social Security or equivalent railroad retirement benefits and workers’ compensation benefits then Social Security (or equivalent railroad retirement) benefits may be taxable. For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Categories: FAQ

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