There is no easy answer to whether or not workers’ compensation benefits are taxable. The simplest is that it depends on the type of benefits.
Technically standard workers’ compensation is not taxable on a federal or state level.
What is workers’ compensation?
Workers’ compensation is a type of insurance employers pay to mitigate workplace accident costs. All jobs have some risk to them. A few of the injuries that workers’ compensation covers are:
- Repetitive motion injuries
- Death or dismemberment
- Back or muscle injuries
- Slip and fall accidents at the workplace or on the job
- Automobile and trucking accidents
- Exposure to disease or toxic chemicals
These are not the only conditions they cover, but they are the most common. The government requires businesses to carry this insurance by law if they have employees. They are exempt from paying it, if you are a contract worker or a 1099 employee.
In which situations is workers’ compensation taxable
Although workers’ compensation technically is not taxable, there are a few situations where it becomes taxable, according to the Social Security Administration. Your benefits might be offset by a specific amount.
If you retire because of a workplace illness or injury, your retirement benefits are taxable. Technically this is not a tax on workers’ compensation but on retirement benefits due to a workers’ compensation injury.
If your workers’ compensation benefits decrease your social security or railroad retirement benefits. Those may be taxable.
If you claim your medical expenses or you receive payment for an injury.
Workers’ compensation and taxation are often tricky and it is always better to do some research before you file your taxes.