The short answer is no, workers’ comp payments are not reportable as income on a federal or state tax return. This should not be confused with other benefits you may receive, such as unemployment benefits, which are fully taxable, or Social Security disability, which may be taxable.
This is one of the questions we often hear from injured workers who come to the Bryant Law Center for help with their case.
Workers’ compensation may provide assistance in three ways: weekly, periodically, or in a lump sum.
A weekly or periodic payment may be made until physicians determine if and when you are able to return to your job. When you return to work, even if you still have medical bills paid by workman’s comp, you will still be taxed on any income you receive from your employer.
In the event you are unable to return to work, you could also receive a lump sum workers’ comp settlement or continued weekly benefits. Those awards typically would not be subject to being reported as income to you.
Are There Exceptions to Workers’ Comp’s Tax Exempt Status?
The only exceptions to worker’s compensation’s tax exempt status are if you are receiving additional income such as social security or unemployment insurance or pay for any other part time work or other regularly taxable income.
The IRS and states do not tax worker’s compensation benefits.
Social Security and Workers’ Comp: When Does the Workers’ Compensation Offset Apply?
One of the few exceptions where a benefit could be taxed is if the injured party also receives SSI income from Social Security.
A portion of the workers’ comp benefit could be taxed if they are used to offset an SSI payment according to an established formula.
You would consult your income tax professional for more information. Your workers’ compensation attorney may also assist you with this calculation for tax purposes.
When Would You Collect Social Security Benefits and Workers’ Compensation Benefits Together?
In cases where a claimant was reported injured on a job while receiving SSID payments, workers’ compensation payments could be used if you’re receiving both workers’ compensation and Social Security disability benefits.
The combined amount of your benefits cannot exceed 80% of your average current earnings which are determined through a federal formula.
Can I Receive Workers’ Compensation Payments if I Also Drew Social Security Retirement?
Yes. Remember the federal government taxes regular social security payments as federal income. Kentucky does not tax regular social security payments as income.
If you are injured and unable to work, you are still treated under workers’ compensation as an injured employee.
If you have other questions or concerns, contact the Bryant Law Center for a thorough review of your workers’ comp case.
Are there Other Situations Involving Workers’ Compensation and Taxes?
Depending on your specific case, some other elements may complicate your taxes when it comes to workers’ compensation benefits. Consulting with an attorney can help clear up any questions you may have about your tax situation.
Depending on your location, you may face federal or state taxes on some or all of your retirement benefits.
You may receive a pension, an annuity, a 401(k), social security disability, or regular social security benefits and may be subject to state or federal taxes. You would need to consult with your tax professional or financial advisor for laws applicable to your location.
Returning to Work
If you are cleared to return to work and start back on your job, you would be taxed on income received from your employer only, you would not be taxed on any payments from your employer’s workers’ compensation carrier.
Any payments received as part of a worker’s compensation payment would not be taxable.
Survivors benefits from workers’ compensation would not be taxable in Kentucky.nor at the local level for any city or county occupational taxes.
Are Workers’ Compensation Settlements Considered Income?
Neither the weekly payments nor any lump sum workers’ compensation awards are considered taxable income by federal or state governments or most local governments.
If you receive any SSI or SSD benefits, any unemployment insurance, or any compensation from your employer (back pay, vacation pay, etc.) you should receive a federal tax form on it and also report that to your income tax preparer.
Contact a Workers’ Compensation Attorney at the Bryant Law Center for a Free Consultation
The Bryant Law Center will review and discuss your benefits and also advise you on many options in your workers’ compensation case.
Our workers’ compensation attorneys can advise you as to whether you should accept or oppose the lump sum settlement that was offered for your injuries.
We can also tell you if it was calculated fairly or if you should have been able to include additional factors to obtain a larger settlement that is fair for you. We also may advise you to consult with your tax preparer for any additional income you receive.