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Taxes and Your Workers Compensation Benefits

From January to April, most in the United States are witness to three seasons: winter, spring and tax season. Whether April still has you shoveling snow or mowing your lawn for the first time, in all parts of the country people will be shifting through receipts and mounds of paperwork as the dreaded deadline for filing your taxes looms. Often, we are most thrown when filing for the first time after a new life event. Perhaps you had your first child, retired, changed jobs or lost your job – your tax forms will be different this year. And one of the most confusing life changes comes when you have been injured on the job. While you may be used to filing for your regular income, many are unprepared for how workers’ compensation will affect their taxes. It is helpful, therefore, to understand the current taxing regulations on workers’ compensation income.

In publication 17 (2011), the Internal Revenue Service (IRS) addresses the issue of whether workers’ compensation payments are taxable. And it’s largely good news for injured workers. The guide states:

“Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.”

In short, you usually are not required to pay taxes for most payments you’ve received as part of your workers’ compensation claim. Even those benefits received by your survivors are often free from taxes. However, even if you had to retire early as a result of your injury or illness from work, retirement payments are taxable. Another exception occurs if the social security or retirement benefits you receive are reduced by workers’ compensation. This amount is considered social security and/or retirement, and you may be required to pay taxes on this income.

Also, if you are able to return to work while receiving workers’ compensation, such as for light-duty work, any regular salary payments you receive are considered regular income and are taxable as such.

The publication does make distinctions between regular workers’ compensation and Railroad Sick Pay and Federal Employees’ Compensation Act (FECA) payments. Consult with the IRS or a tax professional for further information.

Further tax considerations may also apply for workers injured on the job, such as for medical payments, compensation for damages or loss of income. Each case is different, so be certain to thoroughly research your personal claim and taxing situation. If you have been injured on the job, be sure to discuss your concerns or questions with your Chicago workers compensation lawyer when filing a claim for workers’ compensation.

About the Author: Brooke Haley is a Marketing Associate at Millon & Peskin, Chicago workers compensation attorney that practice in the areas of Workers’ Compensation and Personal Injury. Millon & Peskin is a General Civil Litigation Practice with the goal of representing the interests of injured workers, throughout all applicable Courts in the State of Illinois. For more information about Illinois workers compensation lawyer,please visit www.millonpeskin.com.

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