When Is Workers’ Compensation Taxable?

When Is Workers’ Compensation Taxable?

What are Workers’ Compensation Benefits?

Mandated by the federal government, workers’ compensation provides benefits to employees who are injured on the job or become ill as a result of doing their job. Workers’ compensation consists of cash benefits (partial wage payments), healthcare benefits, or both benefits, depending on state statutes governing the disbursement of workers’ comp.

However, once an employee is able to return to their previous position or is able to perform “light duty” work, benefits will stop being issued to the employee.

Texas in the only state that does not require employers to carry workers’ compensation. Individual employers operating businesses in the remaining 49 states are expected to pay premiums to private insurers. These insurers then provide workers’ compensation benefits to qualifying injured or ill employees. States have workers’ compensation boards that regulate the program and mediate disputes over benefits between employers and employees.

Who Is Eligible to Receive Workers’ Compensation?

In addition to an employee having a work-related illness or injury, the employee must also prove they were legally employed by the employer providing workers’ comp and file a claim before the deadline to file expires. The deadline to file a workers’ compensation claim among states ranges from “as soon as possible” to as long as 180 days from the day the injury or illness was medically documented.

Work-related injuries that qualify for workers’ comp do not have to happen in the workplace. For example, an employee could be driving a company-owned vehicle to deliver products to another company and get hit by another car while performing this task. That employee will likely qualify for benefits if they sustain injuries that prevent them from doing their job.

If an employee suffered from depression or anxiety before being hired by an employer, and their mental illness worsened as a result of the employer’s behavior, they may be entitled to workers’ compensation. However, the employee must prove this to their state workers’ compensation agency. In this case, the employee would need to hire a lawyer specializing in workers’ compensation claims.

Can you Receive Both Workers’ Compensation and SSDI (or SSI) Benefits?

Yes, it is possible for you to receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) while receiving workers’ comp benefits. According to the Social Security Administration, if a person is receiving SSDI or SSI and workers’ comp, the total amount of all benefits cannot exceed 80% of their earnings before they became disabled.

If this occurs, the SSA will reduce the amount of SSI or SSDA that the person previously received.

Some state workers’ comp agencies allow a disabled worker to receive a lump-sum payment instead of having monthly payments for over a year or more. Lump-sum payments provided by workers’ comp can also affect monthly SSDI or SSI benefits.

When Does an Employee Have to Pay Taxes on Workers’ Compensation?

Workers’ compensation benefits and lump-sum payments from an employer’s workers’ compensation insurance provider are generally tax-exempt. Federal law does not allow workers’ compensation to be taxed by the federal or state governments.

Employees who receive workers’ comp after being injured on the job, but who can still perform light-duty work at their place of employment, must report their employment income on their tax returns.

For example, Bob’s job required that he stand on his feet most of the day. After injuring his back on the job, Bob was unable to stand for more than 30 minutes without experiencing severe pain. His employer gave him a job that allowed him to sit all day. Bob received workers’ comp benefits while on light duty. He also earned taxable wages while on light duty that he had to report on his tax return. However, he did not have to report his workers’ compensation benefits.

Note that if you receive SSDI benefits in addition to workers’ comp, you may also have to pay taxes if your Social Security payment is offset by worker’s compensation. In this case, the amount of the worker’s compensation offset will be taxed.

Can a Business Deduct Workers Comp Premiums and Payments?

Business owners can deduct premiums that they pay for workers’ comp on their taxes. The IRS states that a deductible business expense must be ordinary and necessary. All states except Texas mandate business owners carry workers’ comp insurance, which is considered a requirement that fulfills both definitions of a deductible business expense.

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