Is Workers' Compensation Taxable?
Imagine having a tough year. Some of your employees ended up getting injured while on the job and now you have to face a stack of paperwork to get workers’ compensation benefits. With an additional claim on your records, you can expect premiums and experience modifiers to increase the next year, but what about taxes?
Is Workers’ Comp Insurance taxable for Employers?
Yes, workers’ comp is taxable. Any workers’ comp payments and benefits that employers pay to their workers is a deductible business expense. Since having workers’ comp insurance is necessary for running a business, business owners are able to deduct the costs of required insurance payments from their taxes.
Incidental insurance payments are deductible expenses for employers according to the federal tax code detailed by the IRS. These are categorized as “costs incurred in the ordinary course of business,” where employers can deduct workers’ comp insurance payments on their Schedule C. Additionally, employers who are insured through private insurers or third parties are also eligible to deduct premiums and related expenses from their taxes.
Are Workers’ Comp Benefits Taxable for Employees?
Generally speaking, workers’ comp benefits are not taxable for employees. However, there are some exceptions where you may have to pay some taxes.
Exclusion from Income
Most employees who receive workers’ compensation benefits can exclude these payments on their annual tax returns, but they may not deduct them. On the other hand, an employee who retires from their job due to a debilitating and permanent injury is not able to deduct retirement pension payments or exclude their retirement benefits.
Continue to Work
If an injured employee continues to work modified or lighter shifts while receiving reduced weekly benefits, those benefits are treated as taxable income. According to the IRS, these payments are not considered excluded benefits, but rather a continuation of paid wages. Therefore, the worker must pay income taxes on their wages.
Collecting Social Security and Workers’ Comp Benefits
When an employee receives both Social Security Disability (SSDI) and Workers’ Compensation benefits, the benefits are now taxable to a certain extent. In these cases, part of the workers’ comp benefits may get reduced and be taxed in a “workers’ compensation offset.”
This means the bulk of taxable worker’s comp is equal to the amount that the Social Security reduces your disability payments.
For example, A worker suffers a permanent injury while on the job. They may receive workers’ comp disability benefits for life and SSDI simultaneously. The workers’ compensation offset may take effect to counteract overpayment and ensure that disability payments remain under a certain threshold. Therefore, if the monthly SSDI check is reduced by $100 due to the workers’ comp offset, then $100 of the workers’ comp payments are taxable.
Bear in mind that each stat has different guidelines and regulations for their workers’ compensation programs. It should be a priority to research your state’s laws and regulation regarding workers’ comp taxation.
What are the types of workers comp benefits for employees?
The severity of a worker’s injury determines the frequency in which they’ll receive their benefits. Benefits usually come in a lump sum payment or weekly payments, with less common cases leading to a structured settlement. After an injury occurs and a claim is approved, one of four classifications of benefits will be offered to an injured employee:
Temporary Partial Disability (TPD)
Injuries in this category typically reward workers who can maintain some capacity for employment. TPD compensates workers for the difference between their old wages and their current, reduced wages.
Temporary Total Disability (TTD)
Injuries in this category prevent a worker from performing any work duties. Victims can expect to receive 2/3 of their income while they recover. Many states offer benefits up to a certain cap or time period. After this period is over, benefits may cease until further medical examinations are performed to determine the current and expected disability status.
Permanent Partial Disability (RPD)
This category is for injured workers who permanently lose the use of their body. This is for employees who can only do a limited amount of work after their injury. The maximum amount they can expect to receive can vary depending on future employability, available vocational training and the state where the incident occurred.
Permanent Total Disability (PTD)
If an injury is so bad that it prevents an employee from working at all in the future, they may be able to get 2/3 of their weekly earnings for the rest of their life.
Learn More About Worker’s Comp Benefits
Workers’ comp insurance and benefits can be tricky, even for the most experienced business owner. At Cornerstone PEO, we have years of experience and can answer any questions regarding workers’ compensation. We specialize in lowering claims and experience modifiers, saving our clients thousands of dollars annually.
Cornerstone PEO also offers other administrative tasks like payroll, tax compliance and administration, human resources, employee benefits and risk management. Our industry leading PEO services offer innovative, cost effective, easy to understand business solutions for companies of any size and industry. Contact us to learn more or a FREE consultation.