If you’ve suffered a workplace injury or illness, you may qualify for workers’ compensation benefits. But as you navigate the claims process, a common question arises: Is workers’ compensation taxable? In most cases, workers’ compensation benefits are not taxed at the state or federal level. However, certain circumstances could impact this, potentially affecting your overall tax situation. In this article, we’ll break down when and how taxes might apply to your benefits and what factors you should consider.
What Is Workers’ Compensation?
Workers’ compensation is a legally mandated insurance program designed to support employees who suffer job-related injuries or illnesses. It provides wage replacement, medical benefits, and rehabilitation costs, ensuring injured workers receive financial and medical assistance while recovering.
In most cases, accepting workers’ compensation means an employee cannot sue their employer for negligence. However, there are exceptions—such as cases where an employer intentionally causes harm or fails to carry the legally required coverage.
How Workers’ Compensation Benefits Work
Workers’ compensation provides financial and medical assistance, including:
- Medical Expenses: Covers doctor visits, hospital stays, surgeries, medications, and approved treatments.
- Lost Wages: Provides partial wage replacement when an employee cannot work due to an injury.
- Rehabilitation Costs: May cover physical therapy and, in some cases, vocational training if required for job transition. Employees needing job retraining must apply through the New York State Education Department (ACCES-VR).
- Disability Benefits: Offers compensation for temporary or permanent disabilities that affect an employee’s ability to work.
- Death Benefits: Provides financial support to dependents if a work-related injury or illness results in death.
Learn more about what does workers’ comp cover in our in-depth blog.
When Is Workers’ Compensation Taxable?
Workers’ compensation benefits are generally not taxable at the state or federal level. These payments do not appear on tax returns and are not subject to income tax. However, there is one exception:
If an employee receives workers’ compensation and Social Security Disability Insurance (SSDI), the SSDI payment may be reduced under the Social Security offset rule. In this case, the offset portion of SSDI benefits may become taxable, but the workers’ compensation payment remains tax-free.
Some factors might affect workers’ compensation. These factors include:
Social Security Disability Insurance
Workers’ compensation benefits can sometimes be combined with Social Security Disability Insurance (SSDI). SSDI provides monthly payments to employees who can no longer work due to a severe illness or impairment expected to last at least a year or result in death.
To qualify for SSDI, employees must have worked in jobs covered by Social Security and have a medical condition that meets the agency’s definition of disability. Age is not a factor in eligibility. Payment amounts are based on average lifetime earnings before the injury or illness.
Receiving both SSDI and workers’ compensation simultaneously is possible, but total benefits cannot exceed 80% of pre-injury earnings. If this limit is reached, SSDI payments (not workers’ compensation) are reduced to maintain compliance with the cap.
Supplemental Security Income
Supplemental Security Income (SSI) is a federal program funded by U.S. Treasury general funds that provides financial assistance to individuals who are disabled, blind, or age 65 with limited income and resources. Like workers’ compensation, SSI payments are not taxable.
SSI Eligibility Requirements
To qualify for SSI benefits, an applicant must:
- Be disabled, blind, or age 65
- Have limited income and resources
- Be a U.S. citizen, national, or a lawfully permitted alien meeting additional criteria.
- Reside in one of the 50 states or the District of Columbia.
Workers’ Compensation and SSI Eligibility
Workers’ compensation benefits are considered income, and SSI payments are reduced based on the federal benefit rate set annually. Depending on the amount received from workers’ compensation, an individual may or may not qualify for SSI. To confirm eligibility for both benefits, consult a workers’ compensation administrator.
Light Duty
If an injured employee returns to work under light-duty restrictions, their workers’ compensation payments may change:
- If they earn the same or more than pre-injury wages → Workers’ comp wage replacement stops.
- If they earn less than pre-injury wages → Partial workers’ compensation benefits continue.
- Only job wages are taxable → Workers’ compensation payments remain tax-exempt.
Retirement
Retiring should not be overshadowed by a workplace injury. Fortunately, workers’ compensation can continue after retirement, though Social Security benefits may affect lost wages.
How Workers’ Compensation and Retirement Work Together
Retirement can impact workers’ compensation benefits, depending on the type of benefits received:
- Medical benefits continue even after retirement, covering injury-related healthcare costs.
- Lost wage payments may be reduced or ended if the worker was already eligible for Social Security Retirement Benefits before the injury.
- In New York, workers’ compensation wage benefits typically do not continue indefinitely for retirees.
Is Workers’ Comp Tax Deductible?
For businesses, workers’ compensation insurance premiums are tax-deductible as an ordinary and necessary business expense. This deduction helps offset the cost of providing coverage for employees. For employees, workers’ compensation benefits are generally tax-exempt at both the federal and state levels. However, there are exceptions.
If you have questions about workers’ compensation, tax implications or need help with a claim, consulting a workers’ comp lawyer is crucial. An experienced NY workers comp attorney can guide you through the process, ensure you receive the benefits you’re entitled to, and help you navigate any legal challenges.
For expert legal assistance, contact Stanley Law Offices today. Our team is dedicated to protecting your rights and securing the compensation you deserve. Call us at 800-608-3333.
Workers Compensation Taxation FAQs
Workers’ compensation benefits are not taxable under IRS rules. These payments are exempt from federal and state income taxes. However, if you receive both workers’ compensation and Social Security disability benefits, a portion may be taxable due to the Social Security offset rule.
Taxable employee compensation includes wages, salaries, bonuses, commissions, and tips. Other taxable benefits may include severance pay, non-accountable expense allowances, stock options, RSUs, and certain fringe benefits like personal use of a company car. Some employer-paid moving expenses may also be subject to taxation.
Non-taxable income includes workers’ compensation benefits, life insurance payouts, certain disability benefits, VA benefits, child support payments, and municipal bond interest. Some Social Security benefits, scholarships used for tuition, and certain gifts or inheritances may also be tax-exempt.
Employers do not pay a direct workers’ compensation tax, but they must purchase workers’ compensation insurance to cover workplace injuries. Insurance premiums are calculated based on:
- Payroll size
- Industry risk level (higher-risk industries, such as construction, pay more)
- Claims history
- These costs are classified as business expenses and are tax-deductible.
