Should I File Taxes This Year if I Am on Workers' Compensation & Don't Work?

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If you get hurt at work and apply for workers' compensation benefits, it may comfort you to know that the IRS does not consider workers' comp to be taxable income so you will have no workers' comp taxes. Any money you are paid during the tax year as a benefit under your state's workers' compensation laws is paid to you tax free, even if you receive it in a large chunk as part of a settlement. However, if you're receiving benefits and income from other sources in addition to the workers' comp, you may still have to file a tax return, even if you didn't work at all during the year.

Tips

  • Workers' compensation benefits are not considered taxable income by the IRS, so you do not pay federal income taxes on it.

Help When You're Hurt

Workers’ compensation pays employees who have been hurt on the job. Each state has separate workers’ comp laws and the federal government has its own program for federal employees and some other workers. In general, workers’ comp is “no fault,” meaning benefits are paid based on the fact that the employee can’t work due to a job-related injury or illness. The question of who might be at fault doesn’t affect eligibility. Sometimes payments include other benefits, such as disability income, which may or may not be taxable. Retirement benefits aren’t part of workers’ compensation even if the injury or illness prompted the decision to retire.

Income Tax and Workers' Compensation

The Internal Revenue Service usually considers workers’ compensation nontaxable income, so you exclude it for tax purposes. This means you might not need to file a tax return if your income for the year consists mostly or entirely workers’ comp payments. Sometimes a taxpayer will also receive Social Security benefits, which may be reduced because of the workers’ compensation. If this happens, the portion of the workers’ comp benefits needed to offset the cut is considered Social Security benefits for tax purposes and might be taxable. In addition, some injured workers return to work on light duty. In this situation, the wages paid are taxable income.

Other Income and Filing Taxes

IRS rules don’t take workers' compensation into account. This means it’s your gross income and filing status that determine if you have to file a tax return. Even if you don’t work, you may have enough income from interest, stock dividends, or investment profits to make filing necessary. When you are married and file a joint return, your spouse might earn enough to require filing taxes. If your filing status was single as of 2017, you were under the age of 65, and you had gross income from any source of $10,400 or more, filing taxes was mandatory. For married couples under 65 filing a joint return, the limit was $20,800. If someone claimed you as a dependent, the cut-off was $6,350. In 2018 the minimum requirements increase to $12,000 for single individuals under the age of 65 and $26,600 for married couples filing a joint return. Since workers’ comp benefits don’t count, don’t include them when you add up your income to see if you have to file.

Additional Reasons To File

Sometimes you must file taxes even though you didn’t reach the income threshold. When you make $400 from self-employment activities, filing is mandatory. This is true for both the 2017 and 2018 tax years. You also have to submit a tax return if you owe unpaid Social Security tax, alternative minimum taxes or additional penalty taxes on withdrawals from retirement accounts. You may want to file even if you don’t have to. You might qualify for tax credits even if you didn’t work, which means some extra cash to supplement workers’ comp benefits. A tax return on file is required documentation of income needed to get some government services and to apply for federal student aid. For more information, please see IRS Publication 525, Taxable and Nontaxable Income.

References

About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

Photo Credits

  • David Sacks/Digital Vision/Getty Images