If your employees are injured or ill on the job, they can benefit through workers' compensation insurance. Their benefits are not taxable at the state or federal level. However, if they receive retirement benefits, such as Supplementary Pension Income or Social Security Disability Insurance (SSDI), they may have to pay taxes on some of their benefits.
Workers' compensation and tax exemptions
Your state's workers' compensation law likely requires you to have coverage. Workers compensation coverage can help pay:
Bodily injury or injury caused by the work of your employees
Occupational illnesses
Loss of wages if an occupational accident or illness prevents employees from working
Ongoing assistance, such as physiotherapy, required to help employees recover
Disability benefits if a doctor diagnoses your employee with a temporary or permanent employment injury
Funeral expenses if your employee loses his life due to an accident at work or an occupational disease
When your employees receive the workers' compensation, they may wonder if they will have to pay taxes for them. The quick answer is that generally, workers' compensation benefits are not taxable. It doesn't matter if you have a slip and fall accident, tendonitis, back injuries, muscle strain, or a carpal tunnel. In most cases, they will not pay taxes on workers' compensation benefits.
When is Workers' Compensation Taxable?
Your employees can pay taxes on workers' compensation benefits if they also receive SSDI or SSI. For example, if one of your employees:
Suffers a permanent work accident, and receives disability and SSDI benefits, workers' compensation may be taxed.
Was injured at work and had to be off work for months to recover. Workers' compensation covers part of lost wages, but they also receive SSI. Then they have to pay taxes on their benefits.
Remember that each state has its unique worker's compensation requirements. Therefore, it is an excellent idea to encourage employees to research the regulations and status of your state, as this will help them prepare their taxes.
Is workers' compensation deductible?
When it comes time to file your taxes, your business will be able to deduct payments, premiums, and workers' compensation.
The Internal Revenue Service (IRS) does not allow them to deduct worker compensation benefits from their employees' tax returns.
Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI)
If any of your employees are receiving supplemental security income or social security disability insurance benefits in addition to workers' compensation benefits, they may be required to pay taxes. What is the difference between SSI and SSDI? It has to do with eligibility.
SSI is a social assistance program that provides money and health care to people in need every month. To be eligible, a person must be:
Over 65 years of age
Blind or disabled
Must be an American citizen
With limited income
Those eligible for SSI may have never worked or may not have sufficient job credit to apply for SSDI. SSI payments are not taxable.
SSDI is a federal tax-funded insurance program. Workers receive monthly social security benefits when:
They have a disability
They have limited income
They have paid social security charges for a while (usually five to 10 years)
Workers can get SSDI when they have enough work credits, depending on how long they have paid Social Security taxes. SSDI benefits are taxable.
Bottom Line
Workers compensation, insurance and accident benefits can be complicated. If you have particular questions, do not hesitate to contact a professional to help address all your questions and calculate the specific rate of pay for your business. Experts will go over the rules and regulations in your state with you to make sure you have the right coverage.
FOR MORE INFORMATION OR TO MAKE AN APPOINTMENT TO SEE HOW WE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CONTACT Pacesetter Financial Services BY CLICKING THE BLUE TAB ON THIS PAGE.
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