Workers’ compensation is designed to protect employees in the event of a work-related accident that leads to injury or illness, preventing the worker from doing their job. However, while out from work the employee still has to pay their bills and purchase necessary items such as food and personal supplies.
For the reasons stated above, the worker needs that compensation. New York recognizes this, and as a result workers’ compensation benefits are not taxable in the state of New York, nor are they taxable by the federal government. In New York, workers’ compensation is two-thirds of regular weekly wage times the % of disability. The amount awarded by the New York State Workers’ Compensation Board is excluded from the gross pay for a work-related injury.
In IRS Publication 17, the IRS confirms “Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.” IRS Publication 17 also states that the exemption applies to survivors of injured workers, meaning that workers’ compensation death benefits are non-taxable as well.
The way in which you receive your benefits does not matter either. Whether you accept a Section 32 Settlement and receive a lump sum, or receive a weekly benefits check, both are untaxable.
When Workers’ Comp Benefits Could be Taxed
There is one scenario in which your workers’ comp benefits could be taxed.
If you receive Social Security Disability and workers’ compensation benefits, the Social Security benefits are taxable to a certain degree. If you receive both, you can only receive up to 80% of your pre-disability earnings from both sources, otherwise, Social Security reduces its benefits.
If you’re in this situation, the IRS will tax you on the full amount of your Social Security benefit, even if Workers’ Compensation has reduced it. IRS Publication 17 has explained this dilemma in full.
“Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.”
“If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits.”
Receiving workers’ comp benefits can complicate your taxes and be a confusing path to navigate. We always recommend working with an experienced attorney and tax professional so you can be sure you’re receiving the benefits you deserve.