Are Workers’ Compensation Benefits Taxable in California?
Not surprisingly, a common question people have when they start receiving workers’ compensation is whether the benefits they receive count as taxable income or not. People justifiably want to know what their reporting requirements are and whether they will have to pay taxes on the amount workers’ comp pays to cover their medical expenses or the amount they receive as wage replacement or disability. The answer to the question is short and satisfying: workers’ compensation is not taxable.
Below we provide a little more detail to answer this question. If you have other questions surrounding workers’ comp, or if you’ve been hurt on the job and need help recovering all the benefits that you are entitled to under the law, reach out to the workers’ compensation specialists at Invictus Law, P.C., for a free consultation with an experienced and knowledgeable California workers’ compensation attorney.
Workers’ Comp Is Not Taxable
Neither California nor the federal government taxes workers’ compensation. This includes every type of benefit received.
Payment of Medical Expenses: Medical expenses related to workers’ compensation are generally not subject to California state income tax. This includes payments for doctor’s visits, medication, surgeries, and other related medical costs. Similarly, these medical expenses are not considered income and are not subject to federal income tax. Moreover, the workers’ comp insurer pays these expenses directly to the healthcare provider, so they never pass through your personal finances. You don’t need to account for the expenses paid when doing your taxes.
Wage Replacement: Wage replacement, also known as temporary disability benefits, provides financial support while you are unable to work. Wage replacement benefits are not subject to state income tax. They are designed to replace a portion of your lost wages and are treated as a non-taxable benefit. Wage replacement benefits are also not subject to federal income tax. This makes the wage replacement part of workers’ compensation completely tax-free.
Permanent Disability: Permanent disability benefits compensate workers who suffer lasting impairments due to workplace injuries. Permanent disability benefits are not considered taxable income in California, thus exempting them from state income tax. Similar to California state law, federal law does not tax permanent disability benefits either. This ensures that the full amount of compensation reaches the injured worker without any reduction due to taxes.
Death Benefits: Death benefits are paid to the dependents of a worker who has died due to a work-related injury or illness. Like other workers’ compensation benefits, death benefits are exempt from California state income tax. The funds provided to the dependents are meant to support them in the absence of the deceased worker’s income and are not subject to state tax. Death benefits are also exempt from federal income tax.
Do I need to report workers’ comp benefits on my taxes?
Typically, no, but it’s always wise to raise the issue with your tax preparer or attorney to be sure. Every rule has exceptions, and there may be limited instances where you need to report workers’ comp. For example, if you are receiving both Social Security Disability Insurance (SSDI) and workers’ comp for the same work injury/disability, your SSDI might be subject to an offset, and that offset amount could be taxable.
Get Answers to Your Questions and Help With Workers’ Comp in Southern California
In California, the taxation of workers’ compensation benefits is a subject that is aligned with both state and federal laws. Whether it’s payment for medical expenses, wage replacement, permanent disability, or death benefits, the tax treatment is consistent. Workers’ comp is a public benefit that is granted tax-exempt status.
At Invictus Law, P.C., we understand the complexities surrounding workers’ compensation law, including the tax implications. If you are in Orange County or the Inland Empire and have questions about your workers’ compensation benefits, please contact our experienced attorneys by calling 949-287-5711 or 888-9WORKLAW. We are here to provide personalized, professional support for all your workers’ compensation needs.