Does Workers’ Comp Send Out W2 Forms?
Learn whether workers' compensation benefits result in a W2 form. Understand the tax implications of your payments and what documentation to expect.
Workers’ compensation provides wage replacement and medical benefits to employees injured or ill due to their job. Generally, these benefits for physical injury or sickness are not considered taxable income under federal law. Since W2 forms report taxable wages, they are usually not issued for these non-taxable payments.
Tax Status of Workers’ Compensation Payments
Workers’ compensation payments for physical injury or sickness are generally exempt from federal income tax. This tax-exempt status applies because these benefits compensate individuals for losses directly resulting from a work-related injury or illness, rather than as earned income. The IRS states that amounts received as workers’ compensation for an occupational sickness or injury are fully exempt from tax if paid under a workers’ compensation act.
This tax exemption typically covers various types of workers’ compensation benefits, including payments for medical expenses, temporary disability, and permanent disability. Since W2 forms report taxable wages, and workers’ compensation for physical injury or sickness is not taxable, employers or insurance carriers generally do not issue a W2 form for these payments. Recipients do not need to report these non-taxable benefits as income on their tax returns.
When Tax Forms May Be Issued
While most workers’ compensation benefits are not taxable, specific situations can lead to the issuance of a W2 or 1099 form. One scenario involves third-party sick pay arrangements. If a workers’ compensation payment is channeled through a third-party payer, such as an employer’s payroll service or a disability insurer, and combined with other taxable sick pay, a W2 might be issued. The portion directly attributable to workers’ compensation for a physical injury or sickness generally remains non-taxable, even if the W2 reports combined amounts.
Tax forms may also be issued if a settlement includes payments for elements beyond physical injury or sickness. For example, if a settlement includes amounts for non-physical injuries, emotional distress not directly linked to a physical injury, or punitive damages, these portions may be considered taxable income. These taxable components could be reported on a Form 1099-MISC. If a lump-sum settlement includes interest on past-due amounts or payments for lost wages not directly attributable to the physical injury, those components could also be taxable and reported on a Form 1099-MISC.
Navigating Your Tax Situation
Understanding the tax implications of workers’ compensation payments requires careful attention to your specific benefits. Review all documentation received from the workers’ compensation insurer or your employer regarding any payments. These documents can provide clarity on the nature and breakdown of the compensation.
If you receive a W2 or a Form 1099-MISC related to workers’ compensation benefits and are uncertain about its implications, or if you believe it was issued in error, seeking professional guidance is recommended. Consulting a qualified tax professional or contacting the IRS directly can help clarify your individual tax reporting obligations.