Imagine you fell of a ladder and broke your leg while carrying out your job duties in New York City. The broken leg will heal, but in the meantime, you're being hit with huge medical bills and the costs of not earning an income. Fortunately, you can qualify for workers' compensation benefits to pay for your medical care and the majority of your lost wages. The question is: What does the IRS have to say about these payments?
Many workers are concerned that they will have to pay taxes on the workers' compensation benefits they receive. However, the only situations when workers' compensation benefits could be partially taxed is when the worker is also receiving Social Security Income or Social Security Disability Insurance. Otherwise, no tax liabilities will be incurred due to the receipt of work comp benefits.
The IRS classifies workers compensation benefits as "non-taxable income" in the same way it classifies the following money received as nontaxable:
- Public welfare fund payments
- Personal injury damages, but not punitive damages
- Disability benefits from no-fault auto insurance payments triggered by injuries
- Compensation for permanent disability and/or disfigurement
In addition to workers' compensation payments to injured workers being exempt, workers' compensation payments to family members of the worker are also exempt from federal tax liabilities.
Make sure that you and your loved ones fully understand the tax consequences associated with any and all injured worker benefits. This knowledge will assist you in preventing your physical, work-related injuries from turning into financial or legal problems in the future.