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Is Workers’ Compensation Considered Income When Filing Taxes?

by | Worker’s Compensation

In most cases, workers’ compensation benefits aren’t viewed as income. Because of this, they are not taxed. 

While the benefits you receive must be reported on your 1040, based on workers’ compensation law, they will be subtracted from the injured worker’s total income. If an injured worker is receiving any other type of retirement or disability benefits, they could face additional financial or tax consequences. 

South Dakota law requires that employers purchase workers’ compensation insurance. The purpose of this is to provide compensation for employees who experience a work-related illness or injury. If you aren’t sure about this or have questions, reach out to our South Dakota workers’ compensation lawyer for assistance. 

Benefits Offered by Workers’ Compensation Insurance 

Workers’ compensation insurance is a type of no-fault insurance coverage. It means that if a worker was negligent and caused their injury, they still may be able to file a workers’ compensation claim. Depending on the severity of a person’s injuries, the worker may be able to recover several benefits that are designed to help them while they recover. Some of the benefits include:

  • Medical bills: workers’ compensation insurance will cover all medical costs related to the injury and medical treatment required for it
  • Temporary total compensation: if a person is injured and can’t return to work on full duty capacity, or if they have to take a job where they earn less than what their pre-injury wage was, the benefit will cover two-thirds of the total lost income. 
  • Vocational rehabilitation: when injured workers can’t return to work full-time, or if they have to accept a job earning less than what they did before their injury, the benefit will pay two-thirds of their former income. 
  • Permanent total disability: when a worker reaches maximum medical improvement but is still permanently disabled, they can receive compensation based on the financial value of their disabled body part. 

Taxing and Workers’ Compensation Benefits 

The workers’ compensation benefits that you receive are not classified as taxable income. This is one reason that an injured employee will only be paid two-thirds of the wages they earned before being injured when they receive benefits. The remaining third that isn’t paid is what would be taken for taxes. An employee’s taxable income is what they earn from their job, and some economic damages will be awarded in personal injury cases. 

Non-taxable income includes disability and welfare payments. Even though the IRS requires the workers’ compensation benefits to be reported, they aren’t taxed. If the injured individual is getting benefits from workers’ compensation and other types of benefits, then there may be tax consequences. 

Getting Help for Your Workers’ Compensation Situation 

When it comes to workers’ compensation benefits, there are more than a few factors to consider. Keep the information here in mind and reach out to our workers’ compensation lawyer. We are here to help you better understand your situation and rights. Contact us today to learn more about your situation and the rights that you have. 

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