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Work Comp Tax Question – Do I Have to Report or Pay Tax on Benefits?

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Work Comp Tax Question We Receive Every Year

The annual work comp tax question becomes very popular this time of year.  Do I have to pay tax on workers compensation and do I have to report it.   The overall answer is that you do not have to pay taxes on Workers Comp benefits.  However, one may want to watch their tax situation if you are drawing Social Security benefits.

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I decided to attempt a Google search to find out if any states tax the benefits. 

After an extensive search,  we found no states tax the benefits.   An IRS search was conducted.   Publication 525 offers the exceptions to the non-taxable workers comp benefits.

The text from Publication 525 is below:

Workers’ Compensation
Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a work­
ers’ compensation act or a statute in the nature of a workers’ compensation act.
The exemption also applies to your survivors. The exemption,however, doesn’t apply to retirement plan bene­fits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sick­ness or injury.
Businessman Assisting Couple Work Comp Tax Question At Home
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If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. See Pub. 554 for more information.

Return to work
If you return to work after qualifying for workers’ compensation, salary payments you receive for performing light duties are taxable as wages.   The workers compensation benefits that replaces your pay reduction is not taxable.
You should download Publication 554 if you are drawing Social Security benefits.  SSDI and Workers Comp can be a little tricky.
Most tax professionals and software handle the Work  Comp Annual Tax Question without any problems.
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2 Responses

  1. Hi friends, its enormous paragraph regarding educationand completely defined, keep it up all the time. No tax on WC benefits in US. Interesting.

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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