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Is Worker’s Compensation Considered Income When Filing Taxes?

by | Jul 20, 2022

If you are a worker who has been injured on the job, you might be wondering if you need to report your workers’ compensation income when filing your taxes. The good news is that most of the time, workers’ compensation is not considered taxable income.

However, there are a few exceptions, so it is important to understand how this income is treated by the IRS. In this blog post, we will discuss what workers’ compensation income is and how it is taxed. We will also provide some tips on reporting accurate information on your tax return.

So read on for all the details.

About Workers’ Compensation

Workers’ compensation is a system of insurance that provides benefits to employees who are injured or become ill as a result of their job. Workers’ compensation benefits can include medical expenses, income replacement, and death benefits. State-run programs typically provide these benefits, and they are generally mandatory for employers in most states.

In the case where the injury is too severe to return to work, disability income benefits may replace a portion of the worker’s lost wages. The amount received from these benefits is usually based on the worker’s pre-injury earnings and can be paid for a limited time or until the worker reaches retirement age. 

The employee can also be transferred to another department, in which case training costs may be covered.

For example, a firefighter who gets injured while on the job may receive compensation benefits that cover their medical expenses and a portion of their lost wages. If the employee cannot return to work, they may be eligible for disability income benefits or an office job within the fire department.

Another example is a factory worker who develops carpal tunnel syndrome from performing the same task every day. The workers’ compensation benefits they receive may cover their medical expenses and lost wages while they are unable to work. In this case, the worker will probably need a doctor’s note explaining their condition before they can receive benefits.

What are the conditions for Workers’ Comp?

In order to qualify for workers’ compensation, the employee must be able to prove that their injury or illness is directly related to their job. In most cases, the employer will also be required to provide evidence that they have workers’ compensation insurance.

If the employer does not have workers’ compensation insurance, the employee may still be eligible for benefits through the state workers’ compensation program. In some states, employees may also be able to sue their employer if they are injured on the job and the employer does not have workers’ compensation insurance.

Your eligibility for workers’ compensation benefits will also depend on the severity of your injury or illness. For example, if you are able to return to work after a few days, you will likely only be eligible for medical benefits. If you are unable to return to work, you may be eligible for disability income benefits or death benefits.

Taxes and Workers’ Compensation

Now that we have a better understanding of what workers’ compensation is, let’s discuss how it is taxed. As we mentioned earlier, workers’ compensation is not considered taxable income most of the time. 

These benefits are intended to replace lost wages and are not considered to be additional income. In fact, most places only pay out 2/3 of the worker’s salary while they are on workers’ compensation, so it is not considered to be a raise either. The same principle applies to welfare payments and other government benefits intended to replace lost wages. 

These payments are tax-exempt. However, there are a few exceptions to this rule. You should still report your workers’ compensation income on your tax return. The IRS uses this information to calculate whether you owe taxes or are eligible for certain tax breaks.

For example, if you are receiving workers’ compensation payments and you are also paying for your own health insurance, you may be eligible for the premium tax credit. This credit can help you pay for a portion of your health insurance premiums.

To claim the premium tax credit, you must file a Form 1040 and include Schedule A. You will also need to provide proof of your workers’ compensation income, such as a W-2 form or an award letter from the workers’ compensation insurance company.

Social Security and Retirement Benefits

Social Security benefits are the most common type of benefits that are considered taxable income. If you receive Social Security benefits on top of your workers’ compensation, you will need to pay taxes. Thankfully, only the portion of your benefits representing your actual earnings is taxable.

 For example, if you receive $1,000 in Social Security benefits and $500 of that is considered taxable income, you will only pay taxes on the $500. The same rule applies to retirement benefits such as pensions and 401(k)s.

 If you receive these benefits in addition to your workers’ compensation, you will only pay taxes on the retirement benefits.

What should taxpayers do if they have questions about their workers’ compensation income and taxes?

If you have any questions about whether your workers’ compensation payments are taxable, you should speak to an accountant or tax attorney. They will be able to help you understand the tax implications of your benefits and advise you on the best way to file your taxes.

You can also visit the IRS website for more information about how workers’ compensation is taxed. The IRS has a section on its website dedicated to workers’ compensation and other types of benefits.

Remember that every situation is different, so it’s always best to speak to a tax professional if you have questions about your taxes.

Find a Wisconsin worker’s compensation lawyer

Vanden Heuvel & Dineen, S.C. is an attorney firm made up of Wisconsin worker’s compensation lawyers. If you have questions about your workers’ compensation and how it may affect your taxes, we can help. We offer a free initial consultation, so please get in touch with us today to schedule an appointment.

Written by Vanden Heuvel & Dineen, S.C.

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