If you were injured on the job and received or are negotiating a workers’ compensation settlement, you may wonder whether your benefits are taxable. The sections below explain your rights.
If you or a loved one were injured at work, don’t assume workers’ compensation benefits are your only option. Contact Zehl & Associates today for a free consultation to discuss your legal rights and all available avenues for recovery.
Our undefeated Work Injury Lawyers have recovered some of the largest workplace accident settlements in the nation for workers injured in catastrophic refinery explosions, oilfield accidents, offshore disasters, and workplace incidents, including the #1 largest workplace electrocution settlement in Texas and the #1 largest oilfield burn settlement in U.S. history. We fight to secure the maximum compensation possible while ensuring our clients have access to the best medical care available.
And we don’t just take on the world’s most powerful employers, contractors, and insurance companies and win. We set records.
Types of Accidents That May Result in Workers’ Compensation Benefits
In Texas, workers’ compensation covers a broad range of workplace injuries.
Common incidents that may qualify for benefits include:
- Falls
- Being struck by or caught in equipment
- Vehicle accidents
- Overexertion injuries
- Repetitive stress injuries
- Exposure to harmful substances
- Workplace violence
Regardless of how your work injury occurred, if it happened in the course of your employment, you may be entitled to workers’ compensation benefits covering your medical care and lost wages. Since workers’ compensation is a no-fault system, you do not have to prove your employer was negligent to receive benefits.
If a third party contributed to your injury or your employer is non-subscriber, you may be entitled to damages in a personal injury claim.
Workers’ Compensation Benefits Are Generally Tax-Exempt
Under Internal Revenue Code § 104(a)(1), amounts you receive as workers’ compensation for a job-related injury or illness are fully exempt from federal income tax, so long as the payment is made under a state workers’ compensation act or a similar statute.
This exemption applies to:
- Weekly or biweekly indemnity payments during your recovery
- A lump-sum settlement that resolves your claim entirely
- Scheduled loss awards for permanent injuries to a specific body part
- Death benefits paid to a worker’s surviving family members
Because these amounts are excluded from gross income, most injured workers don’t receive a W-2 or 1099 for their workers’ comp benefits, and there’s generally nothing to report on your tax return.
When Part of Your Settlement Could Be Taxable
While the core workers’ compensation payment is tax-free, a few specific situations can create taxable income within an otherwise tax-exempt settlement.
- Interest on delayed payments. If your case took a long time to resolve and your settlement includes interest that accrued during the delay, that interest portion is typically taxable, even though the underlying settlement remains exempt.
- Overlap with Social Security Disability Insurance (SSDI). If you receive both workers’ comp and SSDI, the two benefits together generally can’t exceed 80% of your average pre-injury earnings. When workers’ comp offsets your SSDI payment, the offset amount can become taxable as part of your Social Security benefits, even though it originated as workers’ comp.
- Returning to light-duty work. If you’re cleared for light-duty or part-time work while still receiving partial workers’ comp benefits, your wages from that work are taxable like any other income. The workers’ comp portion itself remains tax-free.
An experienced lawyer can help you understand what parts of your income or benefits are taxable.
Third Party Settlements and Taxes
Understanding how settlements get taxed matters for more than just workers’ compensation claims. Many workplace accidents involve overlapping sources of recovery, and not every category of compensation is treated the same way for tax purposes.
- Personal injury settlements for physical injuries are generally nontaxable, similar to workers’ comp, but portions allocated to emotional distress unconnected to a physical injury may be treated differently.
- Lost wage settlements stemming from employment disputes are typically taxable as ordinary income.
- Punitive damages in a workplace injury lawsuit are generally taxable because they’re intended to punish the responsible party rather than compensate you for your losses.
Workplace accidents can result in compensation from multiple sources, including workers’ comp, a third-party liability claim, or both. Therefore, you should have an attorney walk through how each part of your recovery will be taxed before you finalize your claim.
Contact a Houston Workers’ Compensation Lawyer at Zehl & Associates for a Free Consultation
If you were injured on the job and have questions about your rights or available benefits, please contact our Undefeated workers’ compensation attorneys in Houston, Texas at Zehl & Associates Injury & Accident Lawyers to schedule a free consultation today.
We proudly serve Harris County, Midland County, and throughout the state of Texas. We are located in Houston and Midland and throughout the state of Texas:
Zehl & Associates Injury & Accident Lawyers – Houston
2700 Post Oak Blvd #1000, Houston, TX 77056
(888) 603-3636
Open 24 hours
Zehl & Associates Injury & Accident Lawyers – Midland
306 W Wall St Suite 701, Midland, TX 79701
(432) 220-0000
Open 24 hours