26 August 2022
Albert Einstein once said, “The hardest thing in the world to understand is the income tax.” Not exactly the most encouraging sign when you’ve got tax questions. After all, if one of the greatest and most influential theoretical physicists of all time can’t figure out taxes, how are we to?
Fear not. When it comes to questions related to paying taxes on workers' compensation, the answers are not nearly as mind-bending as the theory of relativity.
So let’s get to it. In this article, I’ll focus on the following questions related to workers' compensation:
Here we go.
Just like it’s good practice to protect your employees and your business with workers' compensation insurance, it’s also good practice to know the employee’s tax implications in the event of a workers' comp claim.
Here are answers to common questions that can be helpful for employees and business owners to understand.
The short answer is: generally, no - an individual who receives workers’ compensation benefits does not have to pay taxes on the money.
That’s because when you’re injured on the job and miss work as a result of it, any benefits you receive for lost wages are at a reduced rate from your normal pay. Therefore, the IRS claims it would be unfair to require injured workers' to pay taxes on these benefits.
However, there may be a special case where an employee is required to pay a workers’ compensation tax. 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) on top of the lost wages benefits, then lost wages benefits are taxable. If an employee is not receiving these benefits, then workers' comp is 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. As I mentioned previously, under most normal circumstances, workers' compensation payments are 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 do not qualify as taxable income. Compensation from workers' comp earned from on-the-job injuries or illnesses are fully tax-exempt.
Injured workers can receive checks from their settlements — even if it’s one large settlement payout — without having 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 then those amounts are taxable under IRS rules.
Even in the unfortunate event of death resulting from an occupational injury, next of kin who receive the settlement payout on behalf of the employee who was fatally injured would not have to pay taxes on the payout.
If you’re a business owner, the premiums you pay for workers' compensation insurance are tax-deductible expenses. So you may want to keep track of your premium payments and include them at tax time.
In general, when insurance is deemed “ordinary and necessary,” you can deduct the cost of premiums. 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 these categories.
However, for employees, the answer is: No. The IRS does not allow employees to deduct any workers' compensation benefits they received from their taxes. They’re not contributing to the coverage. You, as their employer, are.
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 with a couple of tips:
The answer to, “Do I need workers' comp insurance?” may depend on where your business operates. Nearly every state requires businesses with employees to have workers' comp coverage.
If your employees work in multiple states, or you plan to expand your business into other states, be sure you take that into account when you get coverage. Doing a bit of homework to understand the workers' compensation laws in your state can help you better understand what coverage you may need, and when.
Even if your business has just one employee, yourself, and is in a state that doesn’t require a workers' comp insurance policy, you should still strongly consider coverage as soon as you hire someone.
If that newly-hired employee suffers a work-related illness or is injured on the job, you could be left paying for some hefty legal and medical bills.
The minimum coverage amount varies on a state-by-state basis, but as soon as you’re ready to start hiring, you should consider shopping around for workers' comp insurance.
When it comes to finding the best workers compensation policy for your business, partnering with a knowledgeable provider is invaluable. That’s where Simply Business comes in. We make the process as simple as possible.
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 one that’s best for you.
Or if you want to talk to a helpful human (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).
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We know insurance, and we understand small businesses. So we have all sorts of answers to other questions that small business owners might have when it comes to workers' compensation, including:
We’ve also written guides for how best to keep your business and your employees safer – from securing a construction site to avoiding lawsuits to improving employee safety in the workplace.
We believe the more personal control you take over your business’s risk of workers' comp claims, the better chance you have to control future workers' compensation insurance premiums.
It doesn’t take a genius to understand the importance of workers' compensation insurance. And hopefully after reading this article, you realize it also doesn’t take one to understand the tax implications of workers' comp, either.
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.
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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.
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
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