Do I Need to Claim Workman's Comp on My Tax Returns?

Do I Need to Claim Workman's Comp on My Tax Returns?
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“Do I claim workers' comp on my taxes?” If this question and similar ones are running through your mind, it will help to understand what the compensation entails and whether the IRS considers it taxable income or not.

Workplace Injuries and Workers' Compensation

Workplace injuries are pretty common. Each year, around 2.3 million people succumb to occupational diseases and injuries worldwide, translating to 6,000 deaths daily. And those numbers are vastly underestimated, which means many more deaths and injuries are unaccounted for.

There were 2,654,700 non-fatal and 4,764 fatal injuries within the U.S. in 2020. Luckily, workers' compensation is usually available for a significant number of people. These payments are made based on the workers' comp insurance that employers usually pay for.

The payments will replace wages and provide medical benefits if you become injured, sick, disabled or lose a loved one due to a work-related injury. As a result, the compensation will mitigate some of the financial difficulties you will face due to your partial or complete inability to work. And if you were a dependent of someone who died as a result of workplace-related injury or diseases, you can still fend for yourself.

Typically, you are required to contact your state’s workers' compensation board if you become injured on the job. They will be responsible for processing your compensation. Otherwise, federal non-military employees will claim their payments at the federal level. Once you receive the workers' comp payments, you must determine what the IRS thinks about them.

Do You Have to Pay Taxes on Workman’s Comp Income?

Are you wondering, “Do I have to report income from workman’s comp?” Well, generally, you don’t, regardless of whether you receive the payment as a lump sum or periodically.

That’s because the IRS considers workman’s compensation paid under a workers' compensation act or statute of a similar nature as fully tax-exempt. Usually, the amount ranges from two-thirds to three-quarters of your salary, and you get to keep it all. Also, if you are a survivor of someone who received this kind of compensation, the payments you get will remain tax-exempt.

However, some exceptions exist. Below are some of them.

  • Even if you retire due to a work-related injury or sickness and receive retirement benefits, they will be subject to taxation.
  • When you return to work and perform lighter duties after qualifying for workman’s comp, your wages become taxable.
  • If you receive a disability pension that pays out to those with service-related injuries, the part that is given out as workers' compensation will be tax-exempt. But the rest of it, based on your previous wages and years of service, will become taxable.
  • Whichever part of your workman’s compensation reduces your Social Security or railroad retirement benefits, will be categorized as Social Security and may be subject to taxes.
  • Under the Federal Employees' Compensation Act (FECA), sick leave pay while the workers’ compensation is being processed and the continued pay up to ​45 days​ while your claim is being decided are all taxable and must be declared as income in Form 1040.

Do You Have to Claim Workers' Comp on Taxes?

Can you claim workman’s comp on taxes when filing your returns? Yes, you can, but you don’t always have to.

First, even though you don’t always have to pay taxes on most workman’s comp, sometimes you may have to report it to the IRS. And then, you can claim any of the tax credits available for those with disabilities stemming from work-related injuries.

Typically, taxable workman’s compensation is reported on Form 1040-SR or 1040. Depending on your previous work and what kind of workers' compensation you receive, you could report the taxable portion as wages, income, annuity or pension, among other things. But the tax-exempt parts are excludable and need not be reported.

Claiming Workman’s Comp on Your Taxes for Earned Income Tax Credit

The earned income tax credit (EITC) is available if you are a low- or moderate-income worker. It enables you to reduce your taxable income and, thus, what you owe the IRS. As a result, you may end up with a larger tax refund.

Workers' compensation is generally excludable from earned income calculations. But you may qualify for the credit if you still perform lighter duties for less pay, have a taxable portion of workman’s compensation or get other earned income after receiving your compensation payments.

To be on the safe side, if you have other sources of earned and unearned income apart from your tax-exempt workman’s comp, you should file your tax returns. Also, if you get taxable workers’ compensation you should report it on relevant forms. And if you have no idea what to do, it would be best to consult a tax professional to help you out.