In 2024, the net premium for workers’ compensation decreased by 3% compared to 2023, while the combined ratio remained at 86, according to the National Council on Compensation Insurance (NCCI)’s annual 2025 State of the Line report.
After collecting workers’ compensation benefits, you may be curious about how workers’ comp affects tax returns. Understanding the relevant details will help you comply with your tax liabilities.
Bear in mind that as a deductible business expense, workers’ compensation premiums are done for federal income tax purposes. The NCCI data above means that many employers paid less in insurance premiums this last year than the previous year. This signals a drop in deductible insurance expenses for employers to report on their 2024 business tax returns. The decrease would result in a slight increase in taxable income as long as other factors remain constant.
Let’s discuss workers’ compensation and how it can be a key factor in an individual’s tax returns.
How Are Workers’ Comp Benefits Taxed?
According to Durham workers’ compensation lawyer Jacob Goad, workers’ compensation benefits are supposed to be there to offer financial stability when a worker suffers from a work-related accident or illness.
Understanding how workers’ compensation benefits are meant to help is important, but it is equally important to know whether those benefits affect a worker’s tax return. Workers’ compensation does not reduce pay due to taxes. Rather, it reduces wages because the benefits substitute work income at a reduced rate, according to a certain benefits and tax framework distinct from that of regular earnings.
In some cases, benefits like Social Security Disability Insurance (SSDI) might be affected by workers’ compensation. In other cases, child dependent benefits might be adjusted when workers’ compensation is paid. If you were awarded workers’ compensation while still making contributions to your pension, you must report any distributions made from that account.
Consult a tax professional for clarification of all tax laws.
Are Workers’ Compensation Payments Taxable Income?
As a rule, workers’ compensation payments are nowhere near taxable. This means that one may receive these benefits fearlessly without the bother of inflating one’s tax bill.
If you have paid your medical bills and received reimbursement from workers’ comp, you may need to account for its impact on your taxes. It can happen that a portion of the money you got as your compensation goes for taxable services. Check with your tax consultant to be informed regarding how to deal with the said situation.
It is worthwhile keeping oneself up-to-date and in the know on what other compensations are taxable and non-taxable under workers’ compensation.
How Do Workers’ Comp Benefits Influence Your Tax Obligations?
The issue of how to reconcile workers’ compensation benefits with tax obligations may appear clear, but, in reality, these payments may very well affect one’s tax obligations.
As a rule, workers’ comp benefits are not supposed to be taxable income, yet they might have a bearing on your tax situation. If you were previously taxed on disability benefits, switching to workers’ comp may decrease your total income. Disclosure of this benefit will greatly influence your tax rate or deductions and credits. If the benefit includes payments for lost wages, these payments may affect the calculation of your total income from other sources.
Always consult a tax professional to gain a complete understanding of your benefits’ relationship with your tax repercussions.
Report Your Workers’ Comp Benefits on Tax Returns
Knowing the right ways to report workers’ comp benefits on your tax return can stave off potential controversies with the IRS. If you receive workers’ comp due to a work injury, you won’t need to file tax reports because these benefits are considered non-taxable. If payment for certain benefits, like SSDI and workers’ compensation, exceeds certain limits, you may have to report part of the amount as income.
Keep a record of all benefits received and any medical expenses associated. Organized paperwork results in a smoother tax filing. Attach the appropriate additional forms and documents when filing your returns.
Common Misconceptions About Workers’ Comp and Taxes
It is often thought that all worker compensation benefits are taxed, but in the actual sense, only a tiny fraction of the benefits you get from a job-related injury or sickness are classified as a taxable income base. If you receive compensation for lost earnings or medical expenses, the federal income tax will not deduct any of these payments. There is an income tax shield from compensation for lost wages and medical expenses.
Workers’ compensation benefits may, under certain circumstances, impact how much Social Security Disability Insurance (SSDI) an individual receives. Federal law provides for when the combined total of SSDI and workers’ compensation benefits is greater than a certain percentage of a person’s past earnings. An “offset,” or reduction by a certain percentage, is legally permitted under federal laws when the combined total of SSDI and workers’ compensation benefits exceeds a certain percentage of the person’s prior earnings.
Medical costs are another common misconception associated with workers’ compensation. While it is true that workers’ compensation typically does cover the costs of medical treatment for a work injury or illness, the bottom line is that just because it is a medical expense does not mean that it will be covered by workers’ compensation in all cases.
Also, an individual’s federal tax return does not normally allow automatic deductions for medical expenses. Standing income tax rules allow deductions for qualifying medical expenses that are paid for outright and not reimbursed. The taxpayer can only deduct medical expenses beginning the year the thresholds set by the IRS are exceeded. Usually, workers’ compensation insurance taxes cannot be deducted because they are reimbursed.
Certain aspects of workers’ compensation, Social Security Disability Insurance, and tax deductions are not commonly understood. Consulting a good tax professional representing the benefit recipient would allow for in-depth assistance based on their particular individual circumstances.
