When Is Workers’ Comp Taxable Income? (2024)

Being injured on the job and not being able to work might naturally cause you to consider a number of financial questions. If you receive workers’ comp disability benefits, you might ask, “Is workers’ comp taxable?” If so, how much should you set aside from your payments each week to pay for this liability?

In general, workers’ compensation disability benefits aren’t treated as income for tax purposes. Because of this, most workers won’t owe any taxes on the benefits they receive.

Like any legal rule, though, there are exceptions. Learn more about the situations in which your workers’ comp benefits could lead to tax consequences.

Are Workers’ Comp Benefits Taxable?

Federal and state tax laws say that all income is taxable; these laws also define “income” in fairly broad terms. However, they specifically exclude workers’ compensation benefits from this otherwise broad definition — in other words, disability benefits you receive through a workers’ compensation program.

Just as weekly workers’ comp benefits aren’t taxed, neither is a lump-sum workers’ comp settlement taxable under the law. This is true for federal, state, and local taxes. Therefore, the answer to the question, “Do taxes come out of workers’ comp checks?” is a definite “no.”

A Small but Significant Exception

When is workers’ comp taxable? Never. However, that doesn’t mean receiving workers’ comp benefits won’t affect your taxes. You don’t get a pass on paying taxes on other income you receive just because you’re also receiving workers’ comp disability benefits.

For example, suppose that you work for six months out of the year before sustaining an injury that keeps you from working the remainder of the year. You receive workers’ comp benefits for the six months you’re unable to work. While you wouldn’t owe taxes on those benefits, the wages you earned before your injury would still be taxed.

Some workers receive both workers’ comp disability benefits and Social Security disability benefits (SSDI) following an on-the-job mishap. These individuals must be careful, as they could face certain tax consequences if their combined benefits get too large.

So long as your SSDI and other disability benefits remain below a certain level, you won’t be expected to pay taxes on them. However, if the total of your SSDI and workers’ comp benefits exceeds 80% of your pre-tax income, your SSDI benefits will be reduced below this 80% level. This surplus or offset in your SSDI benefits is taxable.

The SSDI Offset in Action

To better understand the relationship between workers’ comp disability benefits and taxes, it can be helpful to consider a general example.

Imagine that you made $52,000 in the last calendar year, with an average weekly wage of $1,000. You receive $667 in workers’ compensation disability benefits per week and the equivalent of $300 per week in SSDI benefits.

This gives you a combined total of $967 per week in disability benefits, an amount that’s greater than 80% of your weekly pre-injury income. In this instance, the SSDI offset would come into play.

Your SSDI benefits would be reduced by the equivalent of $167 per week to ensure that your total benefits fall below the 80% threshold. Moreover, the offset amount would be subject to taxation.

How Does Workers’ Comp Affect a Tax Return?

The SSDI offset will only apply if a worker is bringing home too much in combined benefits. It’s important to keep in mind that if the offset applies, any tax you owe is based on your SSDI benefits, not your workers’ compensation. Thus, all of the following questions can be answered in the negative:

• Do you claim workers’ comp on taxes?

• Does workers’ comp count as income?

• If I only receive workers’ compensation, do I need to file taxes?

Some injured workers may wonder, “How will I know if I owe any taxes after receiving workers’ comp?”

If workers’ comp benefits are the only benefits you receive, you won’t need to report the amount of benefits you receive to pay taxes on them. It’s only when you receive SSDI benefits and workers’ comp that you could face tax consequences.

If you end up owing taxes because of the SSDI offset, you’ll receive a Form 1099 that will list the amount of any SSDI offset subject to taxation. You’ll then use this information when preparing your income tax return for that year.

Get Matched With a Skilled Attorney Today

Is workers’ comp taxable? No — though, as explained, that doesn’t mean your benefits won’t affect your end-of-year tax returns.

If you still have questions about your financial situation, fill out our referral form to get matched with a qualified attorney in your area, for example, Chicago, who can tell you what you need to know about your specific circumstances.

You don’t want to simply guess when it comes to your federal and state tax liability. When you reach out to ConsumerShield, we’ll help you connect with a lawyer who can give you a definitive answer to your most pressing tax questions.