Paying Taxes on Workers’ Compensation Benefits

– by Metzger Wickersham Attorney Craig Love Under Pennsylvania law, workers’ compensation benefits are tax free. 26 U.S. Code §104(a)(1) states that amounts received under workers’ compensation acts as compensation for personal injuries or sickness does not constitute gross income. Whether you received wage loss benefits on a weekly basis or through a lump sum settlement, workers’ compensation is not taxable. Workers’ compensation benefits fall into the same category of non-taxable income as the following: • Payments from the Department of Human Services or the public welfare fund • Compensatory damages for physical injuries • Disability benefits that fall under a no-fault auto insurance policy that pertain to a loss of income or earnings capacity as a result of the injuries from the accident • Compensatory damages for the permanent loss or loss of use of a part or function of your body, or permanent disfigurement Workers’ compensation payments to survivors operate under the same circumstances and are also exempt. However, there is an exception to the general rule that workers’ compensation benefits are nontaxable. The exception occurs when the worker receives workers’ compensation benefits at the same time that they receive Social Security Disability Insurance benefits. There are Social Security rules in place in which some small portion of the workers’ compensation benefit is taxable. This is referred to as the “workers’ compensation offset.” The most important thing to remember is that you do not have to pay income taxes on any benefits that are paid out under workers’ compensation in Pennsylvania. If a tax preparer or advisor asks you about it, it is perfectly acceptable to tell him or her that these benefits are not taxed. If you have questions about your rights, it is important to speak with an attorney. Please remember that tax laws change often, which is why professional tax advice should be sought. If you have been injured at work, it is important to seek an experienced workers’ compensation attorney. The employer and insurance carrier are mainly concerned about limiting their liability at the expense of the injured worker. Have questions about workers’ compensation? Contact us at Metzger Wickersham today.