Do I Have to Pay Income Tax on the Workers’ Compensation Money I Receive?

Did you file a workers’ comp claim? You may be wondering: Will I have to pay income tax on the workers’ comp benefits I receive? The short answer is “no.” In Pennsylvania, there is neither federal nor state income tax liability for workers’ comp benefits. A Pennsylvania workers’ compensation attorney can answer your questions about income taxes and workers’ comp benefits in the Commonwealth.

Workers’ Compensation Benefits are Not Taxable Income

Workers’ comp benefits are excluded from gross income under federal tax law (Internal Revenue Service (IRS)). To be clear, wage loss benefits, specific loss benefits, and medical benefits paid through a workers’ compensation claim are not subject to federal income tax. Commonwealth law is very similar to federal law in this regard. Notably, the tax-exempt status of workers’ compensation benefits in Pennsylvania applies regardless of the duration and amount. Weekly checks, lump-sum payments for specific loss, and ongoing disability benefits all receive the same tax treatment.

What to Know About Medical Benefits, Reimbursement Payments, and Taxes

Medical benefits paid through workers’ comp are also non-taxable. Payments made directly to healthcare providers do not count as income. Reimbursement for out-of-pocket medical expenses related to the work injury does not create tax liability either. To be clear, this means that you should not deduct medical expenses that were paid or reimbursed through workers’ compensation. Double recovery is not permitted. Keeping accurate records is key.

When Tax Issues Can Arise With Workers’ Comp (It is Indirect)

Tax complications may arise when workers’ compensation benefits interact with other income streams. If you also receive Social Security Disability benefits, a portion of those federal benefits may become taxable under offset rules. The workers’ compensation benefits themselves remain non-taxable, but they can affect how other benefits are calculated. If you have any specific questions or concerns about your rights or your options, an experienced Pennsylvania workers’ compensation attorney can help.

Workers’ Comp Settlement Proceeds (The Structure Can Matter)

Workers’ compensation settlements in Pennsylvania generally remain non-taxable. However, proper allocation matters. Settlements often include language addressing future wage loss and Social Security offsets. Poorly drafted allocations can create unintended consequences with federal benefits. You do not want a mistake in the paperwork to take money out of your pocket. A Pennsylvania workers’ comp attorney will ensure everything is completed properly.

The Bottom Line: The workers’ comp money that you actually receive is designed to make up for the money that you would have earned but for your injury. It is effectively already adjusted for taxes. Workers’ comp benefits are not taxed under Pennsylvania law or federal law.

Call Our Pennsylvania Workers’ Comp Lawyer for Immediate Help

At DiLoreto, Cosentino & Bolinger P.C., our Pennsylvania workers’ comp attorney handles all types of tax issues. If you have any questions about income tax and workers’ comp benefits, please do not hesitate to contact us today for a free, no-obligation consultation. With legal offices in Gettysburg and Chambersburg, we represent injured workers throughout Central Pennsylvania.