Are My Pennsylvania Workers’ Compensation Benefits Tax-Free?

worker-compensation-tax-free

Under Pennsylvania law, if you are injured on the job, then you may be entitled to workers’ compensation benefits. You need to hire experienced attorneys to help you obtain your benefits and to help you file your workers’ compensation claim. Employers are required to carry workers’ compensation health insurance.

Are Workers’ Compensation Benefits Taxable?

No. Under federal and Pennsylvania law, workers’ compensation benefits are tax-free. This is the law. The federal tax code states: “(a) In general … gross income does not include — (1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness; …” 26 U.S.Code §104(a)(1).

IRS Publication 525 phrases the law in this manner: “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.” See the IRS Publication 525 here, page 18.

The idea behind the rule is simple: Such settlements, awards, and benefits are not really “income” in the sense of earnings or an increase in one’s wealth. Rather, such settlements, judgments, and benefits are recompense for something lost. This is consistent with the idea that taxes are assessed only against profits and that expenses can be deducted. If you buy a house for $100,000 and then sell it for $200,000, the IRS assesses taxes on the increase in value because the first $100,000 is merely recouping what you “lost” so to speak.

This is the same with injuries. You have been physically damaged, and the benefits are merely bringing you back up to where you were before the injury.

The “Source” Of The Payments Is Important

Under the case law, the source of the payments is essential. Indeed, the “source” controls whether the payments are taxable or nontaxable. Two cases involving payments for “sick leave” explain the legal concept.

The first case is Speer v. IRS Commissioner, 144 TC 279 (Tax Court 2015) is instructive. In Speer, the worker, a detective employed by the Los Angeles Police Department (“LAPD”) was granted several periods of temporary disability because of various work-related injuries during his 20+ career with the LAPD. During those disability periods, the detective continued to accrue sick days and vacation days. In 2009, Officer Speer retired and received a lump sum for his unused sick leave days including sick leave days that were added during his periods of disability.

Officer Speer sought to exclude those payments from taxable income for the reason that they had been received under a workers’ compensation act.

The tax court reviewed various laws including the California labor code and the Los Angeles Administrative Code (“LAAC”) and reviewed the LAPD collective bargaining agreement called the Memorandum of Understanding No. 24 (“MOU 24”) with governed employment conditions between the City and the Los Angeles Police Protective League. The tax court concluded that sick leave days were controlled by the MOU 24, not by the California labor code or the LAAC. Since no one could argue that the MOU 24 was a “workers’ compensation statute,” the sick leave days were not benefits or payments made via a workers’ compensation law. As such, the lump payments for unused sick leave days could not be excluded from “income” and were, therefore, entirely taxable.

By contrast, in the case of Givens v. IRS Commissioner, 90 TC 1145 (Tax Court 1988), the tax court held that sick leave payments were not taxable income. In that case, Givens had been employed as a deputy sheriff with the Los Angeles County Sheriff’s Department for over 25 years. He was injured in the course of his duties in 1981 and then retired because of those injuries in 1982. He received workers’ compensation under California law. Everyone conceded that those payments were non-taxable. Deputy Givens also received payments for “sick pay.” Deputy Givens argued that such “sick pay” payments were non-taxable; the IRS disagreed.

After reviewing various laws including the California labor code and the Los Angeles County code, the tax court held that the “sick pay” payments received by Deputy Speer were paid under various sections of the Los Angeles County Code. The court then determined that those sections of the Los Angeles County Code were “in the nature” of a workers’ compensation statute. As such, the payments were made via workers’ compensation laws and, therefore, not taxable.

As can be seen, all payments that arise by virtue of the workers’ compensation statutes are non-taxable. By contrast, payments that flow from other statutory or contractual sources will be deemed taxable.

If You Are Receiving Both Workers’ Compensation And SSDI: Some Workers’ Compensation Benefits Are Taxable

There is an exception to the general rule that workers’ compensation benefits are nontaxable, which is when the worker receives workers’ compensation benefits at the same time that he or she receives social security disability insurance (“SSDI”) benefits. Under these circumstances, there are certain social security rules that create the situation in which some small portion of the workers’ compensation benefit is taxable. This is called the “workers’ compensation offset.”

When you receive both workers’ comp and SSDI benefits, under social security rules, the combined amount of those payments is not allowed to exceed 80% of your average monthly earnings. Your “average earnings” are defined as the greater of:

  • average monthly wage in the last year
  • 1/60th of your total wages for your highest-earning five years (60 months) OR
  • 1/12th your highest-earning year in the last five years

If your combined payments exceed the 80% allowable, the SSDI payments are lowered until down to the 80% limit. Because of various rules, the amount that is reduced is taxable even though the benefits flow from a workers’ compensation statute. As an example, if your SSDI payments are lowered by $100, then $100 of your workers’ compensation is taxable.

It May Not Matter: Not Enough Income To Be Taxed

As we all know, when we complete our tax forms, there are various exemptions and various thresholds for paying taxes. If you do not have taxable income above a certain level, you will not owe any taxes. Most people who receive combined workers’ comp and SSDI benefits do not have enough taxable income to owe federal income taxes. So, it may not matter if some portion of your workers’ compensation benefits is “taxable.” If you do not have enough income to be taxed, then no tax will be due.

Krasno Krasno & Onwudinjo Can Help

An experienced work injury lawyer from Krasno Krasno & Onwudinjo can help determine if you are eligible to receive Pennsylvania workers’ compensation benefits because of a workplace injury. Krasno Krasno & Onwudinjo is a leading Pennsylvania workers’ compensation law firm. We have a team of lawyers and staff who will advocate for you and dedicate themselves to seeking the benefits to which you are entitled. If you are thinking “I hurt myself at work,” do not delay since, under some circumstances, you must notify your employer within 21 days of your injury. Contact Krasno Krasno & Onwudinjo today at 800-952-9640.