Why is Unemployment Taxed But Not Workers Comp Weekly Benefits?
With the Federal Tax filing season finishing up this last Monday, J&L always receives this question from the blog and newsletter readers this time of year. This year a slightly different question came in from a reader. Why are Unemployment benefits taxed while workers comp weekly benefits are tax-free?
The question went on to say that their spouse is drawing unemployment benefits, but has to pay taxes on those funds while workers comp weekly benefits are tax-free. Are they not both wage-replacement benefits?
That inquiry is a great question. Let us look at the answer. By the way, I am not an unemployment insurance expert. I will have to research that area to point out the main differences.
Answer To Workers Comp Weekly Benefits vs. Unemployment Benefits Tax
Let us look at a few differences in taxes – According to the venerable Forbes Magazine:
- Unemployment benefits are designed to replace a portion of your regular wages. As such, the IRS treats them like any other wages and taxes them at your ordinary income tax rate. Whether you’ll actually owe taxes on unemployment benefits, and the rate you’ll pay, depends on your overall tax situation and tax bracket.
The workers comp weekly benefits received by a claimant are designed to replace their total earnings rate so 2/3 are paid tax-free until the injured employee returns to work. A medical practitioner must be holding them out of work for the injured worker to receive benefits.
Unemployment benefits are there as a temporary safety net that usually lasts 26 – 39 weeks. The laid-off worker has the ability to work. The injured worker cannot medically work until they are released back to work.
When the blog reader asked the question on the level of taxes, I ended up emailing them back with more of a “that’s the way they designed the systems” answer. Unemployment benefits are smaller than Workers Comp as more of a motivational factor to return to work as soon as possible. No one is “medically releasing” them from work.
If anyone has a better answer than me on weekly workers comp benefits vs. unemployment benefits, please comment below. Thanks.