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Most people don’t have to think about how workers’ comp works until they need it. So when you do need it after a workplace injury, plenty of questions will come up. For example, how will workers’ comp affect your tax return? Does anything change if you get a settlement?
Fortunately, workers’ comp doesn’t complicate taxes for most people since workers’ comp payments are rarely taxable. Keep reading to understand your tax situation.
No, workers’ comp benefits are not taxable as long as you receive them according to your state’s workers’ comp laws. This rule also applies to people who receive workers’ comp benefits on your behalf. So if you die and your family receives survivor benefits, they won’t have to pay any taxes on that money.
In fact, if you are in a situation where your employer or the government is asking you to pay tax on your workers’ comp payments, it may be a good idea to speak with a tax professional or lawyer.
There are only a handful of situations where you’ll need to pay state or federal taxes while getting workers’ comp. In general, work you do while getting workers’ comp is taxed like any other work you do. And if you get payments for medical expenses you have already reimbursed, you will have to pay back the workers’ comp or pay tax on that since it’s additional income.
Here are five situations when you may pay tax while receiving workers’ comp:
As you wait for your workers’ comp payments to begin, you could have to pay taxes on any medical expenses you deduct or reimburse yourself for.
For example, let’s say you use your health savings account (HSA) to pay a medical bill related to your workplace injury. If your employer then pays you for the cost of those already deducted medical expenses, you’ll have to pay taxes on that money. You may also have to pay back the workers’ comp medical benefits.
Depending on your condition and your state’s policies, you may be able to work while receiving benefits. You might get permanent partial disability or your employer could provide light or modified duties for you to do. Some states have return-to-work programs that ease you back into work while you receive benefits, too.
In any of these situations, you won’t get taxed on your workers’ comp payments, but you’ll owe taxes on any money you earn from working.
If your employer offers to continue paying your usual wages, you’ll need to pay taxes on them as you did before.
States like Ohio let employers choose to keep paying wages instead of having their employees receive workers’ comp benefits. In Ohio specifically, the state calls this program salary continuation, but it may have a different name in your state.
Every state sets your workers’ comp payments at a portion of your original wages. So, you’ll often still earn more by taking your original wages even though they’re taxed. Consider how much your state pays for workers’ comp and talk to a lawyer if your employer offers to cover your wages.
If you use paid time off to cover your expenses after your injury but before receiving workers’ comp benefits, that time off also counts as taxable income. It shouldn’t appear differently than it did on your previous tax returns, but your employer will include it in their report to the IRS.
Some people who can’t work anymore due to their workplace injury can get SSDI on top of their workers’ comp benefits. If you get both types of benefits, you may have to pay tax on your SSDI payments. People who receive Supplemental Security Income (SSI) don’t have to pay taxes on their benefits.
Learn more about taxes on SSDI.
No, you can’t deduct workers’ comp benefits from your federal or state taxes. The law doesn’t let you deduct any payment related to workers’ comp, including medical or dental expenses, coverage for lost wages, and payments to survivors.
The only possible exception is that you can deduct any medical expenses that workers’ comp didn’t pay for or reimburse you for. In that situation, you might be able to deduct those medical costs with the medical and dental expense deduction. However, this is an itemized deduction and the vast majority of taxpayers don’t qualify. You can also only deduct expenses worth more than 7.5% of your AGI for the year.
If you have unpaid medical expenses, you can still use your HSA or flexible spending account (FSA) to help with these expenses. Just remember that you also can’t deduct medical expenses if you paid for them with an FSA or HSA.
As you think about filing for a workers’ comp claim, many other factors besides taxes come into play. For example, should you take a settlement? Are your workers’ comp payments enough or could you ask for more?
An experienced lawyer can answer all of your questions and increase your chance of getting the full benefits you deserve. Take our quick workers’ comp benefits quiz to see if you could qualify and if a lawyer could help your case. We can also connect you with an experienced lawyer near you. (Getting matched is free and you never pay the lawyer until after you get paid by workers’ comp.)
In most cases, workers’ comp won’t affect how you file taxes at the state or federal level. You’ll still need to pay tax on any work income you get in addition to your workers’ comp benefits.
No, you don’t need to pay any tax on workers’ comp settlements, whether you get a lump-sum payment or you get paid slowly over time.
No. You may be able to deduct medical bills that workers’ comp doesn’t cover, though.
Since workers’ comp benefits aren’t taxable, you won’t get a 1099 form and they won't be included on the W-2 from your employer.
If you get disability benefits at the same time as workers’ compensation, you still won’t have to pay taxes on your workers’ comp payments. However, you will have to pay taxes on any Social Security Disability Insurance (SSDI) payments you receive. Supplemental Security Income (SSI) isn’t taxable and neither is short-term disability insurance.
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