Workers’ Comp and Taxes: All You Need to Know

If you’ve ever found yourself wondering if workers’ comp insurance is tax-deductible, then you’re in the right place.

In this short guide, we break down how workers’ comp can affect your taxes and why.

How Does Workers’ Comp Affect a Tax Return?

Just like it’s good practice to protect your employees and your business with workers’ compensation insurance, it’s also good practice to know your employee’s tax implications in the event of a workers’ comp claim.

Here are some answers to common questions that can be helpful for employees and business owners to understand. Some specifics will vary based on a variety of factors — nature and size of your business, for example — so it is important that you consult with a tax professional to discuss your specific situation if you have questions.

Do You Typically Pay Taxes on Workers’ Comp?

The short answer is: generally, no; an individual who receives workers’ comp benefits does not usually have to pay taxes on the compensation they receive.

That’s because when you’re injured on the job and can’t work as a result of it, any monetary benefits you receive for lost wages are at a reduced rate from your normal pay. Therefore, the IRS has deemed it unfair to require injured workers to pay taxes on those benefits.

We recommend partnering with a tax professional to ensure the accuracy of your tax return.

How does workers’ comp generally affect a tax return?

There may be a special case where an employee is required to pay workers’ comp taxes. For example, lost wage benefits may be taxed under certain circumstances. If the employee is receiving federal Social Security Disability Insurance (SSDI) income or Supplemental Security Income (SSI) in addition to the lost wages benefits, then lost wages benefits may be taxable. If an employee is not receiving those benefits, then workers’ comp is typically not taxable.

Keep in mind that each state has its own workers’ compensation requirements, so it’s a good idea for you and your employees to research your state’s regulations. It can help both of you with tax preparation.

Are Taxes Taken Out of Workers’ Comp?

No, taxes are not normally deducted from workers’ compensation payments. Under most normal circumstances, workers’ compensation payments are generally tax-free income for disabled individuals who are unable to work on a temporary or permanent basis.

Is a Workers’ Comp Settlement Taxable?

According to the IRS, workers’ comp settlements under federal law don’t qualify as taxable income. Compensation from workers’ comp earned from on-the-job injuries or illnesses are usually fully tax-exempt.

Injured workers can receive checks from their settlements — even if it’s one large settlement payout — without requiring to list the amount as earned income or paying taxes on the total amount of the settlement.

However, if an injured worker receives punitive damages from a settlement, for example, then those amounts may be taxed under IRS rules.

Even in the unfortunate event of death resulting from an occupational injury, the next of kin who receive the settlement payout on behalf of the employee who was fatally injured typically are not required to pay workers’ comp taxes.

How Does Workers’ Comp Affect a Tax Return for a Business Owner?

If you’re a business owner, the premiums you pay for workers’ compensation insurance are tax-deductible expenses. So it’s important to keep track of your premium payments and include them at income tax time.

Generally, if insurance is deemed ordinary and necessary for your business or trade, the premium costs can be deducted. An “ordinary” cost is an expense common for your particular industry. A “necessary” cost is an expense considered helpful and appropriate for your business. Workers’ compensation insurance falls into those categories.

Workers’ Compensation Insurance: How Do I Get It?

If you don’t already have workers’ compensation insurance, choosing the coverage for your small business may seem like a daunting task, but we can help you get started.

Spend a few minutes with our handy quote tool, and we’ll get to work looking for quotes from respected workers’ comp insurers. Then all you have to do is choose the plan that’s best for you.

Or if you want to speak with one of our licensed insurance agents, you can give us a call at 855-930-2844. We’re here Monday-Friday, 8 a.m. to 8 p.m. (ET).

Everything You Need to Know

We know insurance, and we understand small businesses. So we have many answers to other questions that small business owners might have when it comes to workers’ compensation, including:

• What is Workers’ Compensation Insurance?
• What Does Workers’ Comp Cover?
• Do I Need Workers’ Compensation Insurance?
• How Much Does Workers’ Compensation Insurance Cost?
• Who Pays for Workers’ Compensation Insurance?
• Is Workers’ Compensation Insurance a Requirement?

We’ve also written guides for how best to keep your business and your employees safer — from securing a construction site to avoiding lawsuits to improving employee safety at the workplace.

Final Word

Although the tax laws may seem fairly straightforward when it comes to workers’ comp, as with anything related to taxes, it’s a good idea to speak with an accountant or other tax professional who is familiar with your business. They can provide solid advice and guidance for you. Just like Simply Business® can when it comes to your insurance questions.

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