Ask a Lawyer: Is Workers Comp Taxed?

Orange County Lawyers Discuss Taxes on Workers Comp Benefits

April 2016 is almost here – and everyone’s thoughts turn to Spring . . . and income taxes!

Our experienced Orange County Workers Compensation lawyers receive questions every April about Workers Compensation benefits and taxes. Here are some answers to your general questions about your 2015 taxes and Workers Comp benefits.

Generally Workers Compensation is Not Taxed – Orange County Lawyers

Any money you receive as workers’ compensation benefits for an occupational sickness or injury are NOT taxed – if they are paid under a workers’ compensation act or a statute. This “exemption” from taxes also applies to any survivor benefits that the worker’s spouse or family may collect.

However, there are some special tax considerations you should be aware of, if you are collecting workers compensation.

Exceptions to Workers Compensation Tax Exemption – Orange County Lawyers

Remember that the workers comp “tax exemption” 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, retirement plan benefits ARE taxable.

Also – if part of your workers’ compensation benefits reduces your social security benefits (or equivalent railroad retirement benefits) – then THAT PART of your workers’ compensation benefits will be considered social security benefits for tax purposes.

And, of course, if you return to work (even part time) after qualifying for workers’ compensation, the income or salary you receive for performing light duties ARE taxable because they are wages.

This exemption can be somewhat complicated to calculate. If you have questions, please call one of our experienced Orange County workers comp lawyers for a free consultation.

Workers Compensation Taxes and Disability Pensions

If your disability pension is paid to you under a statute that provides benefits only to workers with service-connected disabilities, then PART of the disability pension may be considered “workers’ compensation” for tax purposes. That part is NOT taxed – but the rest of your pension (based on years of service) is generally going to be taxed as pension or annuity income.

Other Types of Workers Compensation & Federal Taxes

  • Railroad Sick Pay

Payments a railroad employee receives as sick pay under the Railroad Unemployment Insurance Act ARE taxed – and must be included in income – unless they are specifically for an on-the-job injury.

  • Black Lung Compensation

Black lung disability compensation payments are similar to workers’ compensation and are NOT taxed in most cases.

  • Federal Employees’ Compensation Act (FECA)

The Federal Employees’ Compensation Act (FECA) is a workers’ compensation program for federal employees. Payments received under FECA for personal injury or sickness (including payments to survivor beneficiaries in case of death) are NOT taxable.

But, an employee CAN BE taxed on FECA benefits that are “continuation of pay” payments for up to 45 days while a claim is being decided.

Our Experienced Orange County Workers Comp Lawyers Can Help

This article explains only the “general rules” about taxes on workers’ compensation benefits. However, this is a complex subject and you should consult an experienced workers’ compensation lawyer OR accountant to determine if you will be taxed on any of your workers’ compensation benefits.

If you are collecting or applying for workers’ compensation benefits, and want to understand the tax consequences you may be facing, call our experienced Orange County workers’ compensation lawyers for a free consultation.