Is Work Comp Taxable Income?

Work Comp Q&A: Is Workers' Comp Taxable Income?

When dealing with a work-related injury, you may have filed a workers’ comp claim to replace lost wages while working in a limited capacity or recovering from a disability. To add to the stress, many workers are unaware of tax liability for these payments. Are they exempt? Or are workers' comp benefits taxable?

The short answer is that a small portion of workers' compensation benefits may be taxable, but few injured workers have to pay taxes on it. 

Table of Contents

If you want to learn more about how taxes and workers' compensation insurance work, the following questions will be answered to clear up any confusion you may have:

Is workers' comp taxable income?
Which other tax issues involve workers' compensation?
Which benefits are available through workers' comp?
Are there alternative forms of workers' comp insurance?

As with any workers' comp claim, speaking with an independent insurance agent is a smart strategy to understand any potential tax liabilities, as well as insurance coverage options that can benefit you. An independent agent can offer unbiased advice, and is an indispensable part of your financial strategy and your family’s well-being. Throughout this article, be sure to make note of any questions or concerns that you may need to have answered by an agent today.

Is workers' comp taxable income?

Under normal circumstances, workers' compensation benefits are not considered taxable income at the state or federal level. 

There are, however, a few exceptions when workers' comp is considered taxable income:

  • When an individual also receives disability benefits through Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) at the same time as workers' comp, the combined amount of the workers' comp benefits and the disability payments remains below a certain threshold. This is called the "workers' compensation offset." the amount of workers' comp that is taxable is the same amount by which Social Security reduces your disability payments. Therefore, if your monthly SSDI check is lowered by $150 due to the offset, then $150 of your workers' comp is taxable.
  • If an injured employee continues to work in a modified or light-duty capacity while receiving reduced weekly benefits, such as indemnity benefits to make up for lost wages, workers' compensation benefits are treated as taxable income. 
  • Although it rarely occurs, if an insurance company caused a considerable delay or was involved in egregious conduct in handling an workers' comp claim, any interest paid on benefits is considered taxable income.

If you’re still unsure of whether you owe taxes, speak with an independent insurance agent to find out more. These agents are able to help you save money on taxes, suggest alternate insurance options, and ultimately provide you with a more comfortable financial life.

Which other tax issues involve workers' compensation?

Workers' compensation is in the same category as other forms of non-taxable income, including:

  • Payments from public welfare funds and public assistance
  • Compensatory damages for physical injury or sickness
  • Disability benefits under a "no-fault" car insurance policy for loss of income or earning capacity as a result of injuries
  • Permanent disability benefits that lead to partial or total loss of use of an individual’s body
  • Death benefits paid to a worker’s surviving beneficiaries/dependents

Bear in mind that tax laws changed often, so consulting an independent insurance agent can make you aware of any potential tax liabilities or savings that you may be eligible for. 

Which benefits are available through workers' comp?

Workers' comp insurance is designed as a way to provide income replacement for injured workers. Because these workers tend to earn less and may not be able to fully participate in the workforce, state-run workers’ comp programs help.

Depending on the length of an injury (temporary or permanent) and the severity of any disability (partial or total), there are a number of benefit structures that injured workers can receive from state-run workers’ comp programs.

This results in four types of workers’ comp disability benefits:

  • Temporary partial disability benefits (TPD)
  • Temporary total disability benefits (TTD)
  • Permanent partial disability benefits (PPD)
  • Permanent total disability benefits (PTD)

Temporary Partial Disability Benefits (TPD)

  • Paid to employees who can return to work in a modified or “light duty” capacity. 
  • TPD is typically the difference between what you’re paid under TTD and what you’re making in a new position of employment. 
  • TPD ends when an employee returns to work full-time or reaches the maximum number of weeks allotted by state law.

Temporary Total Disability Benefits (TTD)

  • Paid to employees while they’re unable to work and recuperating from a workplace illness or injury. 
  • TTD is generally two-thirds of an individual’s average weekly wage.
  • Similar to the elimination period for disability insurance, there is usually a waiting period for TTD where the injury must keep the employee out of work for a certain number of days before they are eligible to file a claim. 
  • TTD typically continues until the employee:
    • Returns to work 
    • Reaches maximum medical improvement (MMI)
    • Or receives benefits for the maximum number of weeks determined by the state
  • Examples of injuries qualifying for TTD include smoke inhalation, minor sprains and bruising, and non-invasive surgery. 

Permanent Partial Disability Benefits (PPD)

  • Paid when an employee experiences a permanent impairment as a result of a workplace incident. 
  • Payments are correlated with the severity of the disability, and a set number of weeks assigned to the injury is multiplied by the wages the employee is eligible for under TTD. 
  • PPD is generally determined and paid after the worker reaches maximum medical improvement. 
  • Workers are eligible for PPD even while receiving other workers’ comp wage benefits.
  • Examples of  injuries qualifying for PPD include loss of limbs, head trauma, and blindness.

Permanent Total Disability Benefits (PTD)

  • Paid to workers who are severely disabled due to a job-related injury and cannot return to the workforce as a result. 
  • Some states cap PTD benefits and may reduce benefits once the individual qualifies for Social Security Disability Insurance.
  • Examples of injuries qualifying for PTD include brain damage, loss of limbs, and extensive burns. 

Are there alternative forms of workers' comp insurance?

A typical workers' comp claim totals $21,800, and amounts can range from $2,000 to $40,000, which may be insufficient to cover your losses. You should know that if you feel that you would be owed more money than is typically provided, an independent insurance agent can help you determine which type of insurance policies provide the best coverage before disaster strikes. 

An independent insurance agent can recommend long-term care insurance from several providers, which can be tailored to meet your needs as you age. Or an independent agent can recommend a joint-life annuity, which provides a regular stream of income during retirement and continues to pay even when the primary account holder is deceased.

Benefits of an Independent Insurance Agent

Independent insurance agents have access to multiple insurance companies, ultimately finding you the best coverage, accessibility and competitive pricing while working for you. Find an independent insurance agent in your community here.

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