Workers’ compensation benefits provide financial relief after a workplace injury. If you’re receiving these benefits, you may wonder how they impact your taxes. Understanding the tax implications helps you plan your finances effectively.
Are workers’ compensation benefits taxable?
Workers’ compensation benefits are not considered taxable income under federal or California state law. This means you do not need to report them as earnings when filing your taxes. These benefits include payments for medical expenses, temporary disability, permanent disability, and vocational rehabilitation. Since they serve as financial support for work-related injuries, they remain tax-free.
When might taxes apply?
Although workers’ compensation benefits are generally not taxable, there is one key exception. If you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), part of your workers’ comp benefits may be taxable. The government may reduce your SSDI or SSI benefits to prevent your total compensation from exceeding a certain limit. This reduction, known as an “offset,” could make a portion of your workers’ comp taxable. However, in most cases, this amount is small.
How settlements affect taxes
A lump-sum settlement from a workers’ comp case is also tax-free. However, if you invest the settlement money and earn interest, the interest is taxable. Additionally, if part of the settlement covers lost wages, it could be taxable under certain circumstances. Consulting a tax professional can help clarify how your settlement affects your tax situation.
Keeping proper records
While you do not need to report workers’ compensation benefits on your tax return, keeping organized records is essential. Document your benefit payments, medical expenses, and any related financial transactions. Good record-keeping helps if you need to verify your income or eligibility for other benefits in the future.