Many people on workers’ compensation get worried about the tax implications. The question of whether or not workers’ comp benefits must be claimed on your taxes can be answered in one word: NO. These are tax exempt benefits with only rare exceptions.
What Exactly Is Workers’ Comp?
Workers’ compensation is essentially an insurance policy that employers in Tennessee (and most of the country) have to purchase by law. This insurance is set in place to protect both workers and their employers from unnecessarily protracted lawsuits that could otherwise result when an employee gets injured on the job.
Benefits to Employees – Workers’ comp is beneficial to employees because it gives them a sure-fire way to get benefits if they have been hurt on the job. You see, normally when a person is injured other than at work, they must file a personal injury claim against the person at fault for their injury in order to get compensation – and to get compensation they have to prove fault or negligence. That’s a pretty big hurdle to overcome. But workers’ comp dispenses with the need to prove fault entirely. All that is necessary for workers’ comp to kick in is that the person injured was an employee and was injured while carrying out his work duties.
So for instance, if Jack is at Jill’s grocery store and he trips and falls over a box that was left in the isle by a stock boy named Bob, then Jack could sue Jill (or more accurately Jill’s insurance) for any injuries that resulted from the fall. Jack will have to prove that Jill was negligent – or that her employee was negligent – and then he would receive compensation. Jill is held responsible for the negligence of her employee who left the box in the isle where customers walk and, thereby, she is likely liable for Jack’s injuries.
But if her employee, Bob, tripped over his own shoe laces and fell into the freezer section doors – thereby wrenching his neck and breaking his arm – then Bob would have a valid claim for compensation from Jill’s workers’ comp plan. The benefit to Bob here is that there is absolutely no need for him to prove fault. Fault does not figure into the equation at all. He is an employee, he got hurt while on the job, and he is therefore eligible for workers’ comp benefits. Not having to prove fault is a big benefit for injured workers. It greatly simplifies the process and excellerates the speed with which they get their money.
Benefits to Employers – The benefit to the employer in this scenario is that he or she is not dragged through a lawsuit every time that an employee gets hurt on the job. Another benefit is that workers’ comp only pays for tangible, economic losses – like the loss of income caused by the accident. So in the end, the employer (or their insurance company) end up paying far less than they would if they’d had to go through litigation.
So in the example above, Bob could apply for and get benefits through workers’ comp for his injuries. However, this also stops him from being able to file a personal injury claim, which could theoretically get him more money. He got his workers’ comp to help him through this rough spot, and now he is not allowed to further pursue an injury claim unless:
- His employer intentionally caused his accident and injuries, or
- There is a third party that is responsible for his injuries.
For instance, if the freezer door that Bob fell into had ridiculously sharp edges when open, and those sharp edges caused his arm to be sliced to the bone, then he could sue the manufacturer or distributor of the freezer doors for peddling a faulty product.
Now that you have a clearer understanding of the workings of workers’ comp, let’s examine its tax implications.
Workers’ Comp Is Income, Isn’t It?
Well, yes and no. If you’ve been injured on the job and are no longer able to work for a period of time, workers’ comp is very likely your sole source of income. So in that sense, it certainly is income. However, the government does not look at workers’ comp in the same way that it looks at actual wages earned.
In fact, IRS publication 907 states in pertinent part: “The following payments are not taxable … Workers’ compensation for an occupational sickness or injury if paid under a workers’ compensation act or similar law.”
So whether you get your benefits from workers’ comp in one lump sum or receive weekly checks, the IRS looks at workers’ comp as something other than wages or income. In fact, as far as the IRS is concerned, workers’ comp falls into the same non-taxable category as welfare payments, economic damages awarded in a personal injury case (please note that punitive damages are taxable), any disability benefits for loss of income that are received through a no-fault car insurance policy, or recovery for permanent disfigurement or loss of a body part.
Rare Instances of Taxation
There are relatively rare instances when parts of your workers’ comp benefits may be taxed. These are usually when a person is getting both (i) disability benefits or social security benefits and (ii) workers’ comp benefits. But the details of this are complex, so if you fall into this category, you will want to speak to an attorney to discuss the tax implications.
Call Us to Schedule Your Free Case Evaluation Today
We here at Batson Nolan PLC, are intimately familiar with the federal and state laws that apply to workers’ compensation claims. We can help to guide you through the application process, making sure that you get the benefits that you deserve and that insurance companies work so hard to deny you. We can also assist you with any tax issues as well. So call us today, or contact us online to set up your free initial case evaluation.