Workers’ compensation insurance provides essential benefits to employees. When an employee is hurt or gets sick while on the job, workers’ comp can help them continue to support themselves while they recover. But employees may have questions regarding their workers’ comp benefits and taxes, so is workers’ comp taxable?
Generally speaking, no, workers’ compensation benefits are not taxable at the federal or state level. However, if a worker receives retirement benefits, Social Security Disability Insurance (SSDI), or Supplemental Security Income (SSI) in addition to their workers’ comp benefits, they may have to pay taxes on a portion of their benefits.
To better understand how workers’ compensation impacts your taxes, here’s what you need to know about whether you have to pay taxes on workers’ compensation benefits.
What is Workers’ Compensation?
Workers’ compensation insurance is a type of business insurance that provides financial assistance to employees that are injured or become ill while on the job.
Workers’ compensation benefits can cover a wide range of expenses, including lost wages, rehabilitation expenses, medical care, and more. Workers’ compensation is not only great for employees as it can help them maintain financial stability while they are unable to work, but it is also great for employers as it can help them avoid being sued by employees for medical expenses or lost wages after a workplace accident.
Typically, workers’ compensation insurance only pays benefits to employees that are injured while acting within the scope of their jobs. If an employee is injured while doing chores at home, for example, workers’ compensation would not cover them while they are unable to work.
What Does it Cover?
Workers’ compensation insurance is designed to protect employees and ensure they are able to support themselves financially if they are injured at work.
Workers’ compensation can cover a wide range of expenses, including:
- Ongoing healthcare costs
- Lost wages
- Disability benefits if an employee is diagnosed with a temporary or permanent injury
- Funeral expenses if an employee loses their life due to a workplace accident or work-related illness
Workers’ compensation insurance is essential as it ensures employees are able to support themselves and their families while they recover from their illness or injury.
What Isn’t Covered?
Workers’ compensation insurance does not cover certain expenses that result from workplace accidents, including:
- OSHA fines
- Workplace safety features and improvements
- Costs to hire replacement and temporary workers
- Vendor accidents
- Client accidents
Workers’ compensation does not pay benefits to employers. It also does not pay benefits to employees that are injured or become ill while not acting within the scope of their jobs.
Are Workers’ Compensation Benefits Taxable?
When an employee is injured and receives workers’ compensation benefits, they may wonder whether they will have to pay taxes on their benefits.
Generally, workers’ compensation benefits are not considered ‘earned income’ and are not taxable. It doesn’t matter what the nature of your injury or illness is, you do not have to pay taxes on your workers’ compensation benefits.
Under IRS regulations, workers’ compensation benefits are not taxable at the local, state, or federal level. Workers are not required to report their workers’ compensation claims.
This also applies to families that receive workers’ compensation benefits after a family member loses their life while at work.
Of course, if you return to work at any time while receiving workers’ compensation benefits, you will still have to report the income you earn while at work as it is considered taxable earned income.
Additionally, if you take money out of a 401(k) or another retirement plan to supplement your workers’ compensation benefits, you will have to pay taxes on that income.
Is Workers’ Compensation Included on Your W-2?
If you worked as an employee during a tax year, you should receive a W-2 from your employer that includes your taxable earned income.
Since workers’ compensation benefits are not considered earned income, your W-2 should not include any of the benefits you received while injured or ill. In some cases, employers may make a mistake and include this income on your W-2.
If this happens, you should notify your employer immediately and request an amended W-2 that does not include your workers’ compensation benefits.
When Is Workers’ Compensation Taxable?
Workers’ compensation benefits typically are not taxable, but if you are receiving SSDI or SSI benefits in addition to workers’ comp, then you may have to pay taxes on your workers’ compensation benefits.
If you are receiving disability benefits on top of your workers’ compensation benefits, the Social Security Administration (SSA) may adjust your disability benefits, so the combined amount of your disability and workers’ compensation benefits do not exceed a certain threshold. This is called ‘workers’ compensation offset.’
For example, if you are receiving SSDI and workers’ compensation benefits and the SSA reduces your SSDI benefits by $300 per month due to the workers’ compensation offset, then $300 of your workers’ compensation benefits may be taxed.
Employees should also keep in mind that Social Security Disability benefits are considered taxable income and should be reported to the IRS.
Is Workers’ Compensation Tax Deductible?
So workers’ compensation benefits are not taxable, but are they tax deductible?
The IRS does not allow employees to deduct their workers’ compensation benefits on their tax returns.
Employers, on the other hand, may deduct their workers’ compensation premiums, payments, and benefits on their tax returns. Employers should meet with a tax professional to understand their tax obligations and learn more about deductions, be it to a portion, or all of their workers’ compensation premiums.
How to File For Workers’ Compensation
Employees that are injured at work and are eligible for workers’ compensation benefits should take steps to file for workers’ comp as quickly as possible.
Your employer should provide information about how to file for benefits, but here are some of the basic steps involved with filing for workers’ compensation benefits:
- Seek medical care: To file for workers’ comp, you need to seek medical treatment as soon as possible after being injured or becoming ill to create a record of your condition and begin recovery.
- Report your injury: You need to report your injury or illness to your employer. Your employer will likely provide an injury report form that you should fill out and return as quickly as possible.
- Continue medical care: After filing for workers’ comp, you need to continue with your medical care. Otherwise, you may be asked to return to work or lose eligibility for workers’ comp and disability benefits.
- Follow up on your claim: If your employer doesn’t immediately approve your claim and pay your benefits, make sure to follow up on your claim regularly to ensure you receive the benefits you deserve.
You only have a limited amount of time to file for workers’ compensation after being injured or becoming ill, so make sure to complete these steps as quickly as possible to ensure you receive your benefits.
Who Needs Workers’ Compensation Insurance?
Each state has its own requirements regarding workers’ compensation insurance, so employers should review their state’s regulations to learn if they are required to offer workers’ compensation.
In South Carolina, you are required to have workers’ compensation insurance if your business has four or more full or part-time employees and an annual payroll of at least $3,000. Certain industries and businesses may be exempt from this requirement, including licensed real estate agents and agricultural employees that sell agricultural products.
Whether your business is required to carry workers’ compensation insurance, it’s important to consider purchasing it, as it offers essential coverage for your employees. Building a comprehensive benefits package is an important aspect of attracting and retaining qualified employees, and workers’ compensation, in particular, is a benefit that many employees prioritize.
Without workers’ compensation, employees that are injured or become ill at work may not be able to support themselves and their families while out of work, and in some cases, they may sue your business for lost wages and medical expenses.
How Much Does Workers’ Comp Cost?
The cost of workers’ compensation insurance can vary depending on several factors, including:
- Number of employees
- Total payroll
- History of OSHA violations
- Workplace safety features
- Coverage limits
- Claims history
One of the major factors that impacts the cost of your workers’ compensation insurance policy is your industry. Certain industries and professions are considered higher risk than others, as employees are more likely to become injured while on the job. Construction workers or electricians, for example, are more likely to experience a work-related injury or illness than the average office worker.
A KSA Insurance agent can help you understand what factors may impact your insurance rates and how you might save on workers’ compensation insurance.
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Workers’ compensation offers important coverage that helps employees and their families maintain financial stability after a worker is injured or becomes ill while on the job. For employees, the income they receive through their workers’ compensation benefits is not taxable and does not need to be reported as earned income.
At KSA Insurance, we work with businesses in South Carolina and across the southeastern United States to help them find affordable workers’ compensation insurance policies that suit their needs and protect their employees.
Contact us today to get a quote and learn more about whether or not workers’ comp is taxable.