Do You Get a W-2 for Workers’ Comp?
Understand the tax classification of workers' comp payments. Learn why these benefits are usually tax-free and what specific situations can create a tax liability.
You do not receive a Form W-2 for workers’ compensation benefits. These payments are designed to compensate you for a work-related injury or illness, not as payment for services performed. The Internal Revenue Service (IRS) does not classify these benefits as earned income. However, certain situations can alter how they are taxed and reported.
Tax Treatment of Workers’ Compensation Benefits
The reason workers’ compensation benefits are not taxed is that the IRS views them as compensation for sickness or injury, not as wages. Amounts paid under a workers’ compensation act are fully exempt from tax. This exemption applies whether payments are made as a lump sum or on a periodic basis. Because these benefits are not considered wages, they are exempt from federal income tax and are not subject to Social Security and Medicare taxes.
Tax Reporting for Workers’ Compensation
Since workers’ compensation benefits are not taxable income, you will not receive a Form W-2, Wage and Tax Statement, for them. The payer is not required to issue any official IRS tax form for these non-taxable payments. You might, however, receive other forms of documentation, like an annual statement that summarizes the total benefits paid to you. This document is for your personal records and does not need to be filed with your tax return.
Exceptions to the Tax-Free Rule
There are specific circumstances where a portion of your benefits may become taxable. One exception involves wages earned while on light or modified duty. If you return to work in a limited capacity and receive a paycheck for those hours, that income is for services rendered. Your employer will report these earnings on a Form W-2, and they are fully taxable.
Another exception occurs if your workers’ compensation benefits cause a reduction in your Social Security Disability Insurance (SSDI) or certain Railroad Retirement benefits. This is known as a workers’ compensation offset. The portion of your workers’ compensation benefit that equals the reduction in your SSDI is considered taxable by the IRS. For example, if your SSDI is reduced by $300 per month, then $300 per month of your workers’ comp benefit may be subject to tax.
If a settlement or award from a workers’ compensation case includes interest, that interest is taxable income. The principal amount of the settlement for the injury or illness remains tax-free, but any interest paid as part of the award must be reported. The payer may issue a Form 1099-INT for this specific portion of the payment.
How to Report Taxable Workers’ Compensation
If you have determined that a portion of your workers’ compensation is taxable, such as the amount that offset your SSDI benefits, you must report it on your tax return. This income is not reported as wages. Instead, you should report the taxable amount on the “Other income” line, which is found on Schedule 1 (Form 1040). You would then enter the total from Schedule 1 onto the main Form 1040. For official guidance on this topic, you can refer to IRS Publication 525, Taxable and Nontaxable Income.