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Is Workers' Compensation Taxable?

Suffering an on-the-job injury can be both painful and disruptive for any employee. However, if you work for a company with at least three employees, North Carolina law requires your employer to provide workers’ compensation insurance to provide benefits if you are injured while working. Workers’ compensation insurance pays for your medical care and provides weekly checks during your period of disability to make up a portion of the income you cannot earn due to your on-the-job injury.

Some people have questions about workers’ compensation, such as “Is workers’ comp taxable?” In short, no. The government generally does not require you to pay taxes on your workers’ compensation benefits in most cases.

If you have questions about workers’ compensation benefits, talk to a knowledgeable Raleigh workers’ compensation attorney at Younce, Vtipil, Baznik & Banks, P.A. We offer a free consultation.

Why Aren’t Workers Compensation Benefits Taxed?

The benefits you receive for workers’ comp are available on a tax-free basis. The coverage of your medical expenses allows you to receive the treatment you need to recover from your work-related injury and return to work if possible.

Workers’ compensation lost wage replacement payments are paid at the rate of two-thirds of your average weekly wage. That equates to a worker’s take-home pay after the deduction for federal and state taxes. Workers’ comp wage replacement benefits approximate the net pay you would bring home if you were working. For this reason, the workers’ comp insurance company will not send you any tax forms at the end of the year.

One point to note pertains to employees who cannot return to their previous job but are able to undertake different work at a lower income. You might qualify for workers’ compensation temporary partial disability benefits for two-thirds of the difference between your prior income and current reduced income. These benefits are not taxable. However, if you return to light-duty work and are not receiving temporary disability benefits, then the wages you earn are taxable.

What About Lump-Sum Settlements?

In some cases, a workers’ compensation claim may be resolved through a lump-sum settlement. The intention may be for this amount to cover future medical costs and lost earning capacity related to your work injury. You may ask, “Is a workers’ comp lump sum settlement taxable?”

Like regular workers’ comp benefits, any settlement you receive is not taxable. However, you need to be careful when filing your taxes after getting a settlement because the influx of money could still affect your tax situation in the following circumstances:

  • If you invest a large lump-sum settlement and receive interest or quarterly dividends on the investment, you may need to make estimated quarterly tax payments on any interest the settlement money earns.
  • If you use settlement funds to pay medical expenses not covered by workers’ comp, discuss deducting those costs with your tax preparer.

Working with a tax professional and keeping records of how you use your workers’ comp settlement money can simplify filing your taxes.

Complications with Tax-Free Workers Comp Benefits

While the fact that workers’ comp benefits are not taxable might seem straightforward, certain factors can make things more complicated. For example:

  • Loan applications – A lack of income on your tax return may make lenders less likely to give you a loan.
  • Health insurance – Federal health insurance marketplaces often require a minimum income, which can be difficult to demonstrate without earnings on your tax return.
  • Tax deductions or credits – Many people with income below a certain level are eligible for tax credits or deductions. However, an income of zero may disqualify them.
  • Retirement benefits – Receiving workers’ compensation benefits might jeopardize some individuals’ ability to receive pension benefits.

An experienced North Carolina workers’ compensation attorney can help you understand the benefits available and what steps to take to minimize any disruptions to your financial health.

Is Workers’ Comp Tax Deductible?

You cannot claim a deduction for workers’ compensation benefits on your taxes. However, if you itemize your deductions, you may be able to deduct certain medical expenses that workers’ comp does not fully cover. You can deduct unreimbursed medical costs that exceed 7.5 percent of your adjusted gross income. An experienced tax professional can advise you on deducting medical expenses related to your work injury.

However, if you deducted some of your injury-related medical expenses in a prior tax year and then receive settlement money for those expenses, that dollar amount will be taxable when you file the current year’s taxes.

Social Security Disability and Workers’ Compensation Benefits

In some instances, a disabled individual might qualify for workers’ comp and Social Security disability benefits simultaneously.

If you receive workers’ compensation and Social Security Disability payments, the total amount cannot exceed 80 percent of your current earnings before you became disabled.

If you receive a lump sum workers’ compensation payment, the amount of Social Security disability you are eligible to receive may be affected.

It’s important to have a knowledgeable attorney review the details of your situation.

Talk to Our Raleigh Workers’ Compensation Lawyers

If you have questions about the taxability of workers’ compensation benefits, the knowledgeable lawyers at Younce, Vtipil, Baznik & Banks, P.A. are ready to help. We understand that the complicated intersection between workers’ compensation benefits and tax law can be very confusing. You should not need to deal with these types of problems on your own while you are recovering from a serious injury.

With decades of experience assisting injured workers in North Carolina, the team at Younce, Vtipil, Baznik & Banks, P.A., has the knowledge and skills to advise you on maximizing your benefits while minimizing complications. Our firm has staff members who are fluent in English and Spanish, and we are passionate about giving our clients the individual attention they deserve. Call our office today at 919-661-9000 or contact us online for a free consultation to learn more about how we can help you.

About the Author

Younce, Vtipil, Baznik & Banks, P.A.
At Younce, Vtipil, Baznik & Banks, P.A., our clients work closely with a legal team that is dedicated to providing outstanding client service and unflinching legal representation. The majority of our attorneys and support staff have worked with our firm for many years.

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