If you’ve ever found yourself wondering if workers’ comp insurance is tax-deductible, then you’re in the right place.
In this short guide, we break down how workers’ comp can affect your taxes and why.
Just like it’s good practice to protect your employees and your business with workers' compensation insurance, it’s also good practice to know your employee’s tax implications in the event of a workers' comp claim.
Here are some answers to common questions that can be helpful for employees and business owners to understand. Some specifics will vary based on a variety of factors — nature and size of your business, for example — so it is important that you consult with a tax professional to discuss your specific situation if you have questions.
The short answer is: generally, no; an individual who receives workers’ comp benefits does not usually have to pay taxes on the compensation they receive.
That’s because when you’re injured on the job and can’t work as a result of it, any monetary benefits you receive for lost wages are at a reduced rate from your normal pay. Therefore, the IRS has deemed it unfair to require injured workers to pay taxes on those benefits.
We recommend partnering with a tax professional to ensure the accuracy of your tax return.
There may be a special case where an employee is required to pay workers’ comp taxes. For example, lost wage benefits may be taxed under certain circumstances. If the employee is receiving federal Social Security Disability Insurance (SSDI) income or Supplemental Security Income (SSI) in addition to the lost wages benefits, then lost wages benefits may be taxable. If an employee is not receiving those benefits, then workers' comp is typically not taxable.
Keep in mind that each state has its own workers' compensation requirements, so it’s a good idea for you and your employees to research your state’s regulations. It can help both of you with tax preparation.
No, taxes are not normally deducted from workers' compensation payments. Under most normal circumstances, workers' compensation payments are generally tax-free income for disabled individuals who are unable to work on a temporary or permanent basis.
According to the IRS, workers' comp settlements under federal law don’t qualify as taxable income. Compensation from workers' comp earned from on-the-job injuries or illnesses are usually fully tax-exempt.
Injured workers can receive checks from their settlements — even if it’s one large settlement payout — without requiring to list the amount as earned income or paying taxes on the total amount of the settlement.
However, if an injured worker receives punitive damages from a settlement, for example, then those amounts may be taxed under IRS rules.
Even in the unfortunate event of death resulting from an occupational injury, the next of kin who receive the settlement payout on behalf of the employee who was fatally injured typically are not required to pay workers’ comp taxes.
If you’re a business owner, the premiums you pay for workers' compensation insurance are tax-deductible expenses. So it’s important to keep track of your premium payments and include them at income tax time.
Generally, if insurance is deemed ordinary and necessary for your business or trade, the premium costs can be deducted. An “ordinary” cost is an expense common for your particular industry. A “necessary” cost is an expense considered helpful and appropriate for your business. Workers' compensation insurance falls into those categories.
If you don’t already have workers' compensation insurance, choosing the coverage for your small business may seem like a daunting task, but we can help you get started.
Spend a few minutes with our handy quote tool, and we’ll get to work looking for quotes from respected workers' comp insurers. Then all you have to do is choose the plan that’s best for you.
Or if you want to speak with one of our licensed insurance agents, you can give us a call at 855-930-2844. We’re here Monday-Friday, 8 a.m. to 8 p.m. (ET).
We know insurance, and we understand small businesses. So we have many answers to other questions that small business owners might have when it comes to workers' compensation, including:
Although the tax laws may seem fairly straightforward when it comes to workers' comp, as with anything related to taxes, it’s a good idea to speak with an accountant or other tax professional who is familiar with your business. They can provide solid advice and guidance for you. Just like Simply Business® can when it comes to your insurance questions.
I went to college to be an accountant and graduated with a degree in creative writing. Words won out over numbers, but barely. All credit goes to my parents. Had they talked about anything other than banking at the dinner table growing up—and had they never bribed me with Pop-Tarts to read books, play with my Matchbox cars and quietly exercise my imagination—who knows where my left and right brain would be today.
Chris writes on a number of topics such as legal resources, small business taxes, and social media marketing.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated insurance carrier by AM Best. Harborway Insurance is a brand name of Harborway Insurance Agency, LLC, a licensed insurance producer in all 50 states and the District of Columbia. California license #6004217.