When you have been awarded workers’ compensation benefits for a “compensable” work injury, you may want to know how much of this exceedingly necessary compensation will be taxed.
In general, workers’ compensation benefits are limited in nature, and are at least somewhat lower than your regular, pre-injury earnings would be (the North Carolina Workers’ Compensation Act provides for wage-loss payments–also known as “indemnity” benefits–in the amount of only two-thirds (66.667%) of your pre-injury wages, payable on a weekly basis). In light of numerous public-policy considerations, applicable tax law provides that your workers’ compensation benefits should not be taxed as income (see IRS publication 907).
As a result, funds you receive in the form of workers’ compensation benefits (whether on a weekly basis, or as the result of a settlement that you may reach with the other parties to your claim) are generally tax free.
Sometimes, a work-related injury can be deemed only “partially” disabling. If you choose to work in another capacity at your place of employment at lesser pay due to your injury, you do have to pay taxes on these earnings, just as you would pay taxes on other income.
These wages are not included among those benefits provided under the Workers’ Compensation Act, even if you earn them while a workers’ compensation claim is pending, so you would have to pay taxes on them.
As noted above, funds that you receive as a result of the settlement of your North Carolina workers’ compensation claim are among those benefits that are deemed not taxable as income.
By contrast, if you were to settle a separate legal dispute of a different type–for example, a claim arising from your former employer’s violation of federal or state employment law–then the funds you receive as a result of this separate matter may well be taxable as income, either in whole or in part.
Unfortunately, this distinction (between “non-taxable” workers’ compensation settlements and “taxable” settlements of other types) can become tricky. This is because North Carolina workers’ compensation cases can–and very commonly are–settled at the same time as any other outstanding or potential disputes.
When this occurs, care must be taken to try and ensure that the distinction between the legal matters is maintained, and that the potentially-taxable nature of any separate settlement does not render the funds paid in settlement of the workers’ compensation also taxable.
The advice of an attorney can be very helpful in navigating this and other complicated issues that may arise in pursuing and settling claims in North Carolina.
Attempting to manage a workers’ compensation claim on your own can be overwhelming. If you have questions regarding how to protect your right to workers’ compensation benefits, contact us today for a FREE initial consultation.