The Tax-free Benefits of Workers’ Compensation
Updated: Nov 4
The good news is that workers’ comp insurance protects workers from the sometimes crippling medical costs of work-related injuries. The even better news: the direct payments that come from workers’ compensation benefits with regards to loss of income and disability benefits are all tax-free.
Loss of Income Benefits
Typically, after suffering a workplace injury or illness, there is a period of recovery where the employee is unable to perform any of their regular work duties. During this period, you are entitled to two-thirds of your original salary. Note: state laws require a “waiting period” before someone is eligible to file for loss of income benefits. For California, the waiting period is 3 calendar days. This means that if you need more than 3 days to recover before returning to work, your employer would be subject to paying your workers’ comp benefits. This could be up to $1,300 per week.
Additionally, if your injury or illness leaves you with a temporary disability, requiring you to take on modified or “light duty” work at lower pay than before the accident, you would still receive benefits to offset the difference in pay. These benefits are typically equal to two-thirds of your previous wages minus what you are making in your new position.
These benefits last until:
the state decreed maximum duration has been reached (in California, that’s up to 104 weeks within 5 years from the date of injury)
a doctor determines that you’ve fully recovered and can return to full pay status, or
a doctor determines that you have reached Max Medical Improvement (MMI) status and the condition or disability will not fully improve
While these benefits are meant to accommodate for loss of income, they are not considered a source of income themselves. In other words, these payments are not taxable.
Permanent Disability Benefits
The amount of time it takes to reach MMI status varies from a few weeks to even a few years after you first became injured or noticed any symptoms. Once you’ve reached MMI status, the doctor will rate your disability (based on how it will affect your changes of employment) on a scale from 0% to 100%
If you get a rating of less than 100%, meaning your injuries or illness left you with a permanent limitation, you qualify for Permanent Partial Disability (PPD) benefits. The exact amount depends on the severity of the disability (i.e. loss of hearing in one ear versus the loss of an entire limb), when and how the injury occurred, and your previous wages. Total loss of vision in one eye, according to one source, is worth $35,000 in PPD benefits.
If you get a rating of 100%, meaning you are permanently disabled and cannot return to work in any kind of capacity, you qualify for Permanent Total Disability (PTD) benefits. This is reserved for the most debilitating conditions (i.e. loss of both arms or legs). PTD benefits are calculated in a similar fashion to PPD benefits but are usually paid for the rest of the employee’s life. This results in either advanced payments to the worker or, as is often the case, a lump sum payment of future medical benefits. And again, these are tax-free and not considered taxable income.
What benefits are you entitled to?
Workers’ compensation and taxes are complicated topics on the best of days. But legal background or not, any employee who suffers from a job-related injury or illness is entitled to benefits. An experienced workers’ compensation attorney can walk you through the entire workers’ comp process, answer any questions or concerns, and ensure that you receive the full amount of compensation you need.
If you have suffered a work-related injury or illness, Barsoum Law can and will help. We have represented thousands of injured workers throughout California over the past 25 years. We offer a personal focus and individualized care that large corporate firms do not. Our multilingual, multicultural team is dedicated to making sure you obtain the compensation you deserve.
Contact us today at 877-299-1555 or firstname.lastname@example.org schedule a consultation with a member of our team.