If you’re injured at work, you’ll file for workers’ compensation benefits for your medical bills and missing income. Because these benefits are compensation, we often receive the question as to whether or not the workers’ compensation benefits count as income. Typically, the short answer is no. However, whether or not your workers’ comp benefits count as income varies depending on what type of income you’re looking at.
The following information is for general guidance only and should not be taken as tax advice. Speak with your tax preparer about your specific situation if you have any questions.
Workers’ Comp Benefits and Income Tax
While income levels can have implications for taxes, and social security, workers’ comp money does not count as income for tax purposes.
The following types of workers’ comp money are tax-free:
· Money for medical bills for treating your work-related injury
· Money for temporary disability
· Money for permanent disability
· Money for death benefits
You do not need to pay federal tax or Virginia state tax on any of this money. If you’re worried about if workers’ compensation counts as income for taxes, the easy answer is no, it does not.
If you are out of work due to a work related injury and receiving a wage loss check from workers’ comp, that money is not counted as income. You will not pay taxes on wage loss benefits.
If you are still working, even light duty work, then the money you earn from your job will be taxed – just as it normally would be. If you are restricted to light duty work because of a work-related injury, you may be eligible for temporary partial disability through workers’ compensation if the light duty job your employer offers is paying less than the amount earned prior to the injury. In this situation, the earned income is counted as taxable income while the temporary partial disability is not counted as taxable income.
Workers’ Comp and Programs with Income Limits
Workers’ comp benefits may count as income for other income-based programs such as SNAP (Supplemental Nutrition Assistance Program, food stamps), or TANF (Temporary Assistance for Needy Families, or TANF). Local programs such as food banks may or may not count workers’ comp benefits as income.
Workers’ Comp and Money for School
Workers’ compensation benefits are required to be reported on the FAFSA (Free Application for Federal Student Aid) which is a form required to get federal student loans. Workers’ comp benefits may affect the federal student aid is offered. Workers’ compensation may count as income for other scholarships and grant-based programs as well.
If you are unsure if workers’ comp benefits count as income for the specific requirements of a program, it is best that you ask the program directly.
Workers’ Compensation, Social Security, and Income Tax
If you take Social Security Disability Income (SSDI) after an injury at work and are also getting workers’ comp benefits, the SSDI may be reduced. You may still have to pay income tax on the full amount. Whether or not this happens depends on your specific situation and circumstances.
If you retire after your work injury and take traditional Social Security, then the Social Security benefits will be equivalent to whatever they would normally be. You will also be taxed as normal. Your workers’ comp benefits do not affect your regular Social Security at all.
Learn more about how workers’ comp affects SSDI.
Retirement Income After Work Injury and Income Tax
If you retire after you were hurt at work, you will have to pay income tax on your retirement income, just like you would if you retired when you planned. Money coming out of a 401(k) or IRA will have the same taxes as it normally would.