Are Workers’ Compensation Benefits Taxable?

No. Workers’ compensation benefits are not earned income. Workers’ compensation benefits are compensation for a personal injury. They are not taxable.

When a workplace injury occurs, managing the physical recovery and financial strain can be incredibly stressful. Amidst tracking medical bills and navigating time away from work, injured employees frequently encounter an urgent financial question: Are workers’ compensation benefits taxable? Understanding how the Internal Revenue Service (IRS) and state taxing authorities treat these payments is crucial for avoiding unexpected liabilities during tax season. While standard wages are subject to regular income tax, the legal nature of workers' compensation provides a significant layer of financial relief. Examining the tax-exempt status of these benefits, along with a few rare exceptions involving social security or a return to part-time work, clarifies exactly what an injured worker needs to report when it comes time to file.

Workers’ Compensation Benefits

Workers’ compensation covers injuries “arising out of and in the course of employment.” The following losses are covered by workers’ compensation insurance:

• Medical expenses: Injured workers are entitled to payment for medical treatment that is needed to treat the injury.

• Wage loss: Injured workers are paid for time off from work due to the injury. This includes total disablement (unable to work at all) and partial disablement (able to work at a reduced schedule).

• Permanency: Workers that have sustained permanent injuries may be assigned a permanent partial disability rating. This rating causes a monetary benefit to be paid by the insurance company.

• Vocational rehabilitation: This may be help from a Qualified Rehabilitation Consultant with coordinating a return to work, job search, or retraining.

These benefits provide an important safety net for employees after work-related injuries.

Part-Time Work

In some circumstances, injured workers may be working at a reduced wage and also receiving workers’ compensation benefits. Under those circumstances, the wages would still be taxable, but the workers’ compensation benefits would not.

Social Security Offsets

In some circumstances, an injured worker may be able to receive social security benefits and workers’ compensation benefits at the same time. Social security benefits are taxable. Social security sometimes offsets, or reduces, the amount of the social security benefit due to the workers’ compensation benefits being received by the injured worker. This might happen when workers’ compensation benefits and earned income exceed 80% of average earnings before the beneficiary becomes unable to work. It’s important to note that it’s the SSDI payment, not the workers’ comp payment, that would be reduced to account for the 80% limit. In that very narrow set of circumstances, the amount by which the social security benefit was reduced would still be taxable.

Tax Filings

Injured workers will not receive a 1099 or W2 relative to workers’ compensation payments that were received. These payments are not reported to the IRS as part of a tax filing.

Conclusion

The broad rule under both federal and state tax law is reassuringly straightforward: workers’ compensation benefits are completely tax-free because they serve as compensation for a personal injury rather than earned income. Because no W-2 or 1099 forms are issued for standard workers' comp checks, the vast majority of injured employees will never have to report these payments to the IRS. However, nuance arises when multiple sources of income intersect, such as continuing to earn taxable wages through light-duty part-time work, or Social Security Disability offsets. In an abundance of caution, workers’ compensation recipients may consult a tax professional regarding their specific tax situations.

Frequently Asked Questions

• Do injured employees have to report Minnesota workers' comp on their taxes?

  No. Because workers' compensation benefits are considered compensation for a personal injury rather than earned income, injured employees do not need to report these payments to the IRS or the Minnesota Department of Revenue.

• Do insurance companies issue a W-2 or 1099 form for workers' compensation checks?

  No. Workers' compensation insurers do not issue W-2 or 1099 forms for standard benefit payments, meaning there is no tax documentation generated for a recipient to file.

• Are wages taxed if an injured employee returns to light-duty or part-time work?

  Yes. Any wages earned from actual hours worked on light duty are subject to standard income taxes. However, any temporary partial disability (TPD) workers' compensation checks received alongside those wages remain completely tax-free.

• Can a Social Security Disability offset cause workers' comp to become taxable?

  In rare circumstances, yes. If the combination of Social Security Disability Insurance (SSDI) and workers' compensation exceeds 80% of the individual's prior average earnings, the SSDI benefit is reduced. The exact amount of that reduction can become subject to federal income tax, even though the primary workers' compensation checks remain untaxed.

About the Author

‍ Luke Smith is a Minnesota attorney that predominantly represents employees in workers’ compensation litigation. He graduated from Mitchell Hamline School of Law in 2016 and has been practicing workers’ compensation law since 2016. He has experience representing employers, insurance companies, and employees in workers’ compensation cases. A free consultation is available to Minnesota injured workers on request. Feel free to reach out with any questions about workers' compensation benefits.