Do They Take Taxes out of Workers’ Comp Paychecks?

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Here’s a question we hear a lot from our clients: “Is workers’ compensation considered income when filing taxes?” In other words, when you turn in your federal, state and local income taxes in April, will you have to pay on any benefits you received while you were out of work?

The short answer is no, with a few exceptions. In Pennsylvania, workers’ compensation benefits are not taxed like regular income, which includes workers’ compensation settlements. Any workers’ comp or injury-related settlement money that you receive from your employer while you’re out of work does not carry a tax burden and should not be reported on a W2 or 1099.

Do You Have to Report Workers Compensation on Your Tax Return?

Many people who are out of work due to injury are relieved to hear that they won’t have to pay taxes on these benefits. You already have enough of a task paying your medical bills during this time, even though workers’ compensation does pay for some of that. Not receiving your full income on workers’ comp can make it difficult to take care of bills and provide for your family. You may have lost your health insurance coverage too, giving you another added expense.

Under Pennsylvania law, payments made for disability are not eligible for taxes, which includes payments for permanent loss of a part of the body and permanent disfigurement.

Payments that you receive for work even while still collecting workers’ comp are taxable. For example, say you go back to work and take on a different job than the one you had been performing when you were injured. You’ll have to pay taxes on the wages you collect for your “new” job, even though you’re also still getting workers’ comp. Consulting with a lawyer can help clear up any confusion you have on this topic.

Sometimes, insurance companies mistakenly send a W2 or 1099 for workers’ comp benefits, and people think they have to pay, which is not the case.

Do You Have to Pay Taxes on Workers’ Compensation Settlements?

There’s one possible situation where workers’ compensation is considered income when filing taxes, though it’s rare. If your benefits were paid out by Social Security disability insurance (SSDI) or Supplemental Security Income (SSI), they might be eligible for tax. In most cases, the Social Security Administration will reduce the amount of the check you receive as part of the workers’ compensation offset.

If your case involves payments made by SSDI or SSI, talk to a lawyer to determine your tax liability and whether you should include the income on your taxes. While it’s a small number of cases, it’s best to feel confident about your tax bill rather than wonder if you owe any moment.

Get in touch with Frommer D’Amico today to discuss your case. We specialize in workers’ compensation law and are all board-certified in this area. Call us at 717-400-1000 or get in touch with us online.