Must you pay taxes on your workers’ compensation benefits?

On Behalf of | Nov 28, 2020 | Workers' Compensation |

Few things have the potential to be more stressful than suffering an on-the-job injury. After all, in addition to experiencing pain, you may lose the ability to support yourself and your family members financially. Workers’ compensation benefits may help you make ends meet. 

In the Tar Heel State, workers’ compensation benefits often include both lost wages and medical expenses. Your benefits may only cover two-thirds of your average weekly wages, however. Fortunately, workers’ compensation benefits are not typically taxable. 

IRS tax rules

Guidance from the Internal Revenue Service indicates that workers’ compensation benefits are not taxable income, provided you receive them through a state’s workers’ compensation system. Similarly, if your spouse dies because of a workplace injury or occupational illness, you probably do not have to pay taxes on your workers’ compensation survivor benefits. 

Nevertheless, if you retire early because of a work-related injury, you may have to pay taxes on the retirement benefits you receive. That is, IRS tax rules that apply to workers’ compensation benefits do not necessarily extend to other types of income, even if that income stems from a workplace injury or illness. 

Your budget

Budgeting for ordinary expenses after sustaining an on-the-job injury can be difficult, as you may have to live on only two-thirds of your weekly wages. Knowing you likely do not have to pay taxes on your workers’ compensation benefits may help put your mind at ease, though. 

When you are recovering from your injury and working on returning to work, you may use all the workers’ compensation benefits you receive without setting aside some funds to satisfy a future tax bill. 

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