Do You Report Workers Comp on Taxes?

Workers’ compensation provides financial assistance to employees who experience an occupational sickness or injury, offering wage replacement and medical benefits. This article clarifies the tax implications of these payments for recipients.

Taxability of Workers’ Compensation Payments

Workers’ compensation benefits received for an occupational sickness or injury are not considered taxable income at the federal level. This non-taxable status applies to payments such as medical expenses, temporary disability, permanent disability, and survivor benefits. This rule is outlined in Internal Revenue Code Section 104(a)(1).

This exemption from federal income tax extends to state income taxes in most states. Individuals should confirm specific state laws. The intent behind this tax exemption is to provide financial support to injured workers without imposing an additional tax burden on benefits intended for recovery and lost wages.

An exception occurs when workers’ compensation benefits reduce or offset Social Security Disability Insurance (SSDI) benefits. A portion of the SSDI benefits reduced by workers’ compensation may become subject to taxation. This interaction means that while the workers’ compensation itself remains non-taxable, it can indirectly cause other benefits to become taxable.

Reporting Workers’ Compensation on Your Tax Return

Since workers’ compensation benefits are generally not taxable, they are typically not reported as income on Form 1040. Recipients usually do not receive a Form W-2 or a Form 1099 for these payments. This is because these benefits are not considered wages or taxable income by the IRS.

If you receive workers’ compensation payments, you will not need to include them directly on your tax return in most scenarios. However, if your workers’ compensation benefits have led to an offset of your Social Security Disability Insurance (SSDI) benefits, the reporting process changes. In this specific situation, the taxable portion of your SSDI benefits, which is influenced by the offset, will be reported on your tax return.

Recipients should maintain records of all workers’ compensation payments received. These records, even if not directly submitted to the IRS, serve as documentation for financial management and for clarifying any questions that might arise regarding your benefits. This practice supports accurate financial oversight.

Interaction with Other Disability Benefits

Workers’ compensation benefits can significantly interact with other disability benefits, particularly Social Security Disability Insurance (SSDI). A federal rule stipulates that the combined amount of workers’ compensation and SSDI benefits cannot exceed 80% of your average current earnings before you became disabled. If this threshold is surpassed, the Social Security Administration (SSA) may reduce your SSDI benefits through an offset.

When this offset occurs, the portion of your SSDI benefits that was reduced by the workers’ compensation may become taxable. The IRS treats this offset amount as if it were Social Security benefits for tax calculation purposes. Therefore, the workers’ compensation, while not directly taxed, effectively makes a portion of your Social Security benefits taxable.

The Social Security Administration will provide a Form SSA-1099, which is a Social Security Benefit Statement. This form details the total amount of benefits paid, and it will often include information about any workers’ compensation offset that occurred. The amount shown on the SSA-1099 is used to determine the taxable portion of your Social Security benefits.

Supplemental Security Income (SSI) is a needs-based program, and its interaction with workers’ compensation differs from SSDI. SSI benefits are generally not taxable. While workers’ compensation can reduce SSI benefits dollar for dollar, this reduction does not typically result in the workers’ compensation itself becoming taxable income.