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Workers Comp Weekly Benefits Tax Free But Unemployment Taxed


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?

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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.

Bottom Line

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.



James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management 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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