When an employee suffers a workplace-related illness or injury, workers’ compensation can help soften the blow — at least financially. But is workers’ comp taxable like an employee’s regular income? The short and fast answer is no.
That answer can be a relief for an employee receiving workers’ comp payments who wonders, “Do you pay taxes on workers’ comp?” However, there are exceptions. Nothing can be that easy, right?
Let’s take a closer look at workers’ compensation and taxes, including how workers’ comp can interact with other benefits like Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).
Does workers’ compensation count as income?
When employees are out of work and receive workers’ compensation due to an illness or injury they sustained on the job, the payments don’t count as income. Because both state and federal laws do not categorize workers’ comp payments as income, they aren’t taxable for employees or their survivors.1
That said, there is a situation that could lead to the payments becoming taxable.
When is workers’ comp taxable?
A portion of an employee’s workers’ compensation can become taxable if they collect SSDI benefits (or equivalent railroad retirement benefits) and receive more than 80% of their average current earnings.2
But what are average current earnings, exactly? According to the Social Security Administration (SSA), an employee’s average current earnings will be the highest of the following three amounts:
- A covered employee’s average monthly income for their highest-earning year of the five years before the disability began.
- A person’s average monthly income (from covered employment or self-employment) earned during their highest earning five-year period after 1950.
- The average monthly wage used to determine an employee’s unindexed disability primary insurance amount.3
So, if an employee at your small business is receiving more than 80% of their highest earnings category through their workers’ comp and SSDI benefits combined, the SSA will reduce the SSDI payment so that the total amount will be 80% of their average current earnings.4 Then, the employee will be charged taxes on their workers’ compensation in an amount equal to the difference between the full SSDI payment and the reduced SSDI payment.
For example, if the employee’s average current earnings were $4,000 per month before qualifying for workers’ comp, the employee could receive $2,200 per month in SSDI benefits for a family of four. If they also receive $2,000 per month in workers’ comp payments, total benefits would amount to $4,200, which is 105% of the employee’s average current earnings.
Because they are now above the 80% threshold, SSDI would reduce the benefit payment by $1,000 to $1,200 per month so that total benefits were equal to 80% of $4,000 ($3,200). In this case, because the SSDI payment was reduced by $1,000, $1,000 of the employee’s workers’ compensation would become taxable.5
Now, you may want to know whether you can receive other benefits from workers’ comp payments.
Is workers’ comp tax deductible?
As an employer, you are responsible for the total cost of workers’ compensation insurance and can deduct the premiums you pay from your income when filing your tax returns.6
Employees of your small business, on the other hand, don’t pay anything for workers’ comp, so the benefit is not tax-deductible for them.
How does workers’ comp affect Social Security disability insurance?
As mentioned concerning taxable workers’ compensation, if an employee receives SSDI benefits and workers’ compensation, their workers’ comp payments can potentially reduce their SSDI benefits.
The SSA won’t allow the total amount of an employee’s combined SSDI benefits and workers’ compensation to exceed 80% of their average current earnings. The SSA will reduce an employee’s SSDI payment to meet the 80% threshold.
How does workers’ comp affect supplemental security income?
To qualify for supplemental security income (SSI), an employee must meet several requirements, including having limited income. For SSI purposes, income includes money an employee earns from work and the money they receive from various sources, including workers’ compensation.7
The more money an employee receives from workers’ comp, the lower their SSI benefit. Workers’ comp benefits can also potentially disqualify an employee from SSI payments if they cause a large income increase. Since the allowable income limit will vary depending on where an employee lives and the details of their household, an employee would need to contact the SSA to find out their exact income limit.8
If you’re not sure whether you need to get workers’ compensation insurance, read on.
Who needs workers’ comp?
Almost all states require businesses to carry workers’ compensation for their employees (except Texas). The coverage helps to ensure that companies can pay for the various expenses resulting from a workplace injury or illness. For example, workers’ comp can cover medical expenses, death benefits, lost wages, rehabilitation and permanent or temporary disability.
However, even when workers’ comp isn’t required, it is wise to have coverage. For example, independent contractors are often exempt from compulsory coverage requirements, but one injury and their income could come to a screeching halt. That’s where workers’ comp can help cover treatment costs, lost wages and more.
Workers’ comp coverage that keeps business moving
No one likes to think about getting sick or hurt on the job, but the truth is it happens, and it can be expensive. Workers’ comp insurance protects your small business from the impact of an employee injury so that you can keep your company moving forward.
At Thimble, we make the process as easy as possible for you so you can get the coverage you need without the hassle. Simply click, “get a quote” or download the Thimble app to get started. Answer a few questions about your coverage needs, get a workers’ comp quote and you can be covered in minutes.
Sources:
- IRS. Publication 525.
- FindLaw. Are Workers’ Compensation Benefits Taxable?
- Social Security Administration. Workers’ Compensation, Social Security Disability Insurance, and the Offset: A Fact Sheet.
- Social Security Administration. How Workers’ Compensation and Other Disability Payments May Affect Your Benefits.
- Social Security Administration. How Workers’ Compensation and Other Disability Payments May Affect Your Benefits.
- IRS. Publication 525.
- Social Security Administration. Supplemental Security Income (SSI) Eligibility Requirements.
- Social Security Administration. You May Be Able to Get Supplemental Security Income (SSI).
