02/28/2024
Are Workers Compensation benefits taxable as income?
This time of year clients ask if their WC benefits are taxable. The IRS considers benefits paid under the workers compensation system for lost wages as exempt. If there is a SSDI offset, that could be taxable as income.
IRS Publication 525 reads:
Workers' Compensation
Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they're paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, doesn't apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.
Part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. See Pub. 554 and Pub. 915, Social Security and Equivalent Railroad Retirement Benefits, for more information.
Return to work. If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages.
Disability pension. If your disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities, part of it may be workers' compensation. That part is exempt from tax. The rest of your pension, based on years of service, is taxable as pension or annuity income. If you die, the part of your survivors' benefit that is a continuation of the workers' compensation is exempt from tax.