Is Workers Comp Taxable? Here’s What You Need to Know

Workers comp benefits help disabled employees pay for their bills and medical care while they’re recovering from injury or sickness. But in most cases, it’s not enough to cover all of their expenses. That’s why the thought of having to pay taxes on workers comp bothers most beneficiaries.

So if you’re one of those people asking “is workers comp taxable?“, this post is for you. Here’s what you need to know about paying taxes on workers compensation.

When is Workers Comp Taxable?

Section 104(a)(1) of the Internal Revenue Code states that benefits received “under a workers compensation act or a statute in the nature of a workers’ compensation act” shall be excluded from one’s gross income.

As such, in general, workers compensation benefits are NOT taxable both on the federal and state level. This applies to lost wages compensation, medical benefits, and even survivor benefits paid to dependents. But if on top of those, you’re also receiving benefits like Social Security Disability (SSDI) or Supplemental Security Income (SSI), you might be required to pay taxes on a portion of your workers compensation.

How to Compute Your Taxable Income on Workers Comp

As mentioned, if you need to pay taxes on your workers comp, it will only be for a portion of it. That “portion” will be taken from your benefits’ offset amount.

In general, your combined workers’ compensation and SSDI benefits should not exceed 80% of your income before you got disabled. If it does, the SSA will reduce your disability benefits. This is called the “offsetting” process.

For example, let’s say you were earning $3,000 before your injury and your workers comp is $2,000 per month. On top of that, you are eligible for an SSDI benefit of $1,000. Combined, they total $3,000 which is way more than $2,400 (80% of your previous earnings). In such instances, the SSA will reduce your SSDI benefit by $600.

Some states, however, employ the “reverse offsetting” approach. Instead of your social security benefits, they will reduce your workers’ comp. So your total benefits still fall within the 80% threshold.

Regardless of which benefit got offset, the offset amount will form part of your taxable income. Since SSDI benefits are already taxable, that amount will be taken against your workers’ comp benefits.

Taking from the example above, your taxable income each month is $1,000 ($600 from worker’s comp and 400 from your SSDI). If you have any other income aside from the aforementioned benefits, those will be reflected in your tax returns too.

How Much Tax Will You Pay (If Any)?

Even if part of your workers comp benefits are taxable, there’s a good chance you won’t be paying any tax on it. Or if you do, the amount is rather negligible.

Remember that you only have to pay taxes if your taxable income has exceeded the IRS’ limit. Most of the time, disability benefits alone won’t be enough to put you over that threshold. This is especially true for those receiving SSI as they won’t qualify for it in the first place if they are earning above the minimum wage.

Do I Have to Report Workers Compensation on My Taxes?

Since workers comp is essentially a nontaxable income, you’re not required to report it in your tax returns.

But if you’re receiving both workers comp and social security benefits, the offset amount (if any) should be reported. If you returned to work within the fiscal year, any wages you receive even while on light-duty restrictions will also be taxable.

Other disability benefits that are also considered non-taxable are:

  • settlements awarded by the court as compensation for disability or physical injuries
  • personal injury benefits
  • compensation for lost wages from a no-fault insurance policy
  • compensation for permanent loss of a body part/s

Is Workers Comp Tax Deductible?

No. You can only claim a tax deduction for expenses. Workers’ comp benefits are, obviously, not an expense on your part. As such, the Internal Revenue Service doesn’t allow employees to deduct workers’ compensation benefits from their taxes. But businesses may claim workers compensation premium as part of their tax deductions or credits.

Is a Lump Sum Workers Comp Settlement Taxable?

Lump-sum settlements usually involve large sums of money which can inflate your income for a certain period. But a lump sum settlement is basically just months or years worth of workers comp benefits that you receive all at once. As such, they are not subject to tax.

Doing taxes while receiving workers comp

Do I Get a 1099 From Workers Compensation?

The IRS’ 1099 form declares miscellaneous income for sources other than your employer. But as mentioned, workers compensation is a non-taxable income. As such, you should not get a 1099 if you’re only receiving workers compensation payments.

If you received a form 1099 by mistake, you can contact your employer to rectify the error. You can also call your state’s workers compensation office or the IRS to know your next steps.

However, if you’re also receiving SSDI and SSI, the SSA will send you a 1099 tax form every January. It will list down the total benefits you’ve received from their office the previous year so you’ll know how much social security income you can report in your tax returns.

When Can You Receive Both Workers Comp and Social Security Benefits?

There’s no law that says you can’t receive social security benefits if you’re already receiving workers comp. So if you’re eligible for both, then you should be able to receive them concurrently.

Workers comp, in essence, is a benefit you get for any injury or illness you got while at work. In most states, this will be paid by a private insurance company that your employer took out the policy from. But the rates and terms are heavily regulated by state laws and statutes.

Since workers comp is administered on a state level, the eligibility requirements can vary. But in general, you can only claim workers compensation if your injury or sickness is work-related. Some states also require that your injury must be the fault of your employer. Though, if you live in states like Florida, you can claim workers comp regardless of who’s at fault.

SSDI and SSI, on the other hand, are funded by the federal government. So the rules on eligibility are the same all over the country. Basically, you can only claim social security disability benefits if:

  • you have paid enough social security taxes
  • your disability is expected to last for at least a year or result in death

If you haven’t paid enough social security taxes, you can still apply for supplemental security income. Provided, however, that you are earning below the SSA’s income threshold.

This is why, in most cases, you can only receive both workers comp and disability benefits at the same time if you:

  • are working in a job that’s covered by social security
  • have a permanent disability

It’s also possible to receive both SSDI and SSI if you meet the SSA’s eligibility criteria for both types of benefits. So one individual can receive workers comp, SSI, and SSDI all at the same time.

If you’re not sure whether you qualify for all of these benefits, an experienced workers compensation lawyer like Victor Malca can help you. He has already helped thousands of injured workers in Florida get the benefits they rightfully deserve. He can help you get yours too. Call us now for a free consultation.

(Related: Work-Related Injuries in the US)

VICTOR MALCA – Florida Workers Compensation & Social Security Disability Attorney

Victor Malca P.A. has over 27 years of litigation experience in Workers Compensation and Social Security Disability lawsuits. His experience and continued success when fighting for his clients puts him among the most trusted workers’ compensation attorney’s in Florida. He specializes in representing injured workers on compensation benefit cases and disabled individuals claiming lost social security disability benefits.

Book a free consultation today. Our unwavering advocacy for employee rights and privileges are recognized by our past clients across South Florida.

About The Author

Judy Ponio is a writer and editor for the Victor Malca Law P.A. website and blog. She enjoys helping people in need with questions about social security disability and workers compensation law. She has a passion for helping those in need and the elderly with accurate legal information that can make a positive difference in their lives.