Workers’ compensation is paid to employees who get injured or become ill on the job and as such, are unable to work. Under state laws, employers must purchase insurance plans to cover workers’ compensation for their employees. Employees are not expected to contribute to this insurance.
Workers’ compensation compensates wage loss and covers associated medical expenses until an employee can return to work. Should the illness or injury result in death, the settlement often extends to the employee’s dependents.
Since this payment is often made in place of a salary, it tends to raise the question: is workers’ compensation considered income when filing taxes?
Is Workers’ Compensation Tax Deductible?
Workers’ compensation covers two-thirds of your regular salary until you can earn it again. Consequently, most beneficiaries are often confused about their tax deductibility.
According to the IRS 2018 publication 525, amounts received from this settlement are exempt from tax when paid under the workers’ compensation act. This also applies to the employee’s dependents in the event of death.
Simply put, workers’ compensation carries no tax or tax rate. It is not considered income when filing your taxes.
When Is Workers’ Compensation Taxable?
In some cases, the answer to the question ‘is workers’ compensation considered income when filing taxes?’ is yes. These instances often stem from you utilizing other benefits or going back to work. They could make your workers’ compensation either partially or fully taxable.
Arizona Workers’ Compensation Attorneys advise that you familiarize yourself with these situations, so you are never caught unaware. They include:
If You Are on Social Security Disability Insurance (SSDI)
According to the IRS, the part of your disability pension that is associated with work-related disabilities is not taxable. This is because it is counted as workers’ compensation. On the other hand, the part based on years of service is taxable.
This applies to your dependents’ benefits should you die due to your disabilities. Some portions may be taxed while others may maintain their tax-exempt status.
If You Are Receiving Workers’ Compensation and Social Security Benefits
If you receive both workers’ compensation and Social Security Disability Insurance benefits (SSDI), the social security portion may be taxed. However, your workers’ compensation amount would still be tax-exempt.
Simply put, you may be subject to an offset.
If You Retire Due to Your Injury
Employees retire due to different reasons, including age, length of service, injury, or illness. Regardless of your reason for retiring, your retirement plan benefits are not subject to tax exemption. This includes retirement caused by a work-related injury or illness.
When You Go Back to Work at Your Previous Job
Your workers’ compensation benefits are designed to cover your wage loss until you can return to work. Should you go back to your pre-injury job, your wages become taxable.
When You Return to Work but a Different Position
Sometimes, employees go back to work but take lighter duties. The wages you earn on this job are taxable.
Talk to an Arizona Workers’ Compensation Attorney Today
The workers’ compensation system is pretty straightforward. It allows people to get compensation for any work-related injuries. Nonetheless, things can get complicated. Your claim could be denied, for instance. Or you could fail to receive your remuneration.
If you bump into some problems with your workers’ compensation claim, contact Snow, Carpio, and Weekley, PLC, to speak to an expert Arizona Workers’ Compensation Attorney.