Are Workers’ Compensation Benefits Taxable?
If your employees get hurt or sick from their job, they can get benefits through workers’ compensation insurance
. Their benefits aren’t taxable at the federal or state level. But, if they receive retirement benefits, Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), they may need to pay taxes on a portion of their benefits.
Workers’ Comp Benefits and Taxes
Accidents or injuries caused by your employees’ work
Illness that results from work
Lost wages if a work-related injury or illness prevents your employees from working
Ongoing care, like physical therapy that’s needed for your employees to recover
Disability benefits if a doctor diagnoses your employee with a temporary or permanent injury from their work
Funeral costs if your employee loses their life in a workplace accident or from a work-related illness
When your employees are receiving workers’ compensation benefits, they may wonder if they’ll have to pay taxes on them. The quick answer is that, generally, workers’ compensation benefits are not taxable. It doesn’t matter if they’re receiving benefits for a slip and fall accident, muscle strain, back injury, tendinitis or carpal tunnel. In most cases, they won’t pay taxes on workers’ comp benefits.
When Is Workers’ Compensation Taxable?
Your employees may pay taxes on workers’ compensation benefits if they’re also receiving SSDI or SSI. For example, if one of your employees:
Suffers a permanent injury on the job and receives both disability benefits and SSDI, their workers’ compensation payments may get taxed.
Gets hurt on the job and has to take months off from work to recover. Workers’ compensation covers some of their missed wages, but they also receive SSI. So, they may start paying taxes on their benefits.
Keep in mind that each state has unique workers’ compensation requirements
. So, it’s a good idea to encourage your employees to research your state’s and regulations. It can help them with their tax preparation.
Is Workers’ Comp Tax Deductible?
For your employees, the Internal Revenue Service (IRS) doesn’t allow them to deduct workers’ comp benefits on their tax returns.
Workers’ Comp Taxes: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI)
If one of your employees receives SSDI or SSI benefits on top of their workers’ comp benefits, they may have to pay taxes. What’s the difference between SSDI and SSI? It has to do with eligibility.
SSDI is a federal insurance program that’s tax-funded. Workers receive monthly Social Security benefits when they:
Have a disability
Paid Social Security payroll taxes for a certain amount of time (usually five to 10 years)
Have limited income
Workers can get SSDI when they have enough work credits, based on how long they’ve paid Social Security taxes. SSDI benefits are taxable.1
SSI is a welfare program that provides cash and healthcare on a monthly basis to individuals who need it. To qualify, a person must be:
Over the age of 65
Blind or disabled
A U.S. citizen
On a limited income
People eligible for SSI may not have ever worked or don’t have enough work credits to apply for SSDI. SSI payments are not taxable.2
Learn More About Workers’ Comp Benefits
Workers’ comp insurance and benefits can be tricky. We have over 100 years of experience helping protect businesses with workers’ compensation insurance. We can answer your questions and calculate your business’ specific workers’ comp rate
. Our specialists will even go over your state’s rules and regulations with you to help ensure you get the right coverage.