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IRS Workers Comp Rules – Two Payment Red Flags To Avoid

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IRS Workers Comp Rules – Pay Attention To These Three Closely

Every year near the personal tax filing deadline, we receive questions on IRS Workers Comp rules.  This year was no different with the COVID-extended deadline of July 15th.  I decided to cover the one IRS Workers Comp Rule that I cover every year plus two quirky yet costly tax situations to avoid if you are receiving workers comp benefits (medical or indemnity).

picture reviewing irs workers comp rules
Wikimedia Commons – Harland Quarrington

I was reading a great tax book, Jeffrey Schnepper’s How To Pay Zero Taxes over the last week.  I noticed that his book covered two other IRS “no-nos” on filing taxes with workers comp benefit payments.

The first one is one that almost everyone knows – the other two are ones that should be followed closely.  After all, who wants to run afoul of the IRS?

Are Workers Comp Benefits Taxable?

In almost all cases, WC benefits are non-tax items.  You are receiving 2/3 of your average weekly wage.   If Worker Comp benefits were taxable, then your “take-home-pay” would be less than 50% of what you were previously earning in your job.

Before signing any worker’s comp agreements from the insurance carrier, be very sure of the Average Weekly Wage that appears on the form.  Check your W-2’s from last year and your current paycheck stubs.

If something looks amiss, email the claims adjuster to make sure your Average Weekly Wage figure is correct.

Supplemental Payments From Your Employer – An Indirect IRS Workers Comp Rule

When I was reading Schnepper’s tax book, I said, of course, the supplemental payments are not workers comp.  If no one explains that to the injured employee, they could end up owing a large tax bill.   This would not be the goal of helping an injured employee while out of work.

Some governmental agencies such as public schools and other types of employers decide to “cover the income gap” by paying supplemental benefits to bring the injured employee up to 100% of their pay.

I have disagreed with doing this for years as supplemental payments may remove the motivation to return to work.  I have written a few articles on this subject and include these payments in many presentations.

If an employer decides to offer supplemental payments, withholding taxes should apply the same as if the employee was presently working.

If the employer decides to not withhold taxes, then the injured employee could have a large tax burden.   The burden would defeat the purpose.

Medical and Health Savings Accounts – The Hidden IRS Workers Comp Rule

Doctor showing IRS Workers Comp Rules instruction on the computer
Wikimedia Commons – Pexels

The rule comes from deep in the Schnepper tax book.   If an injured employee has workers’ comp medical bills that have been or will be paid by the worker’s comp insurance carrier, these cannot be turned in to a Medical Savings Account or a Health Saving Account.

Doing so would be effectively “double-dipping” from two different benefit accounts.   The IRS could disallow the Health Savings Account resulting in a huge tax bill

Who would have thought about that IRS workers comp rule?

 

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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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