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Workers in Pennsylvania are protected by workers’ compensation insurance if they are injured on the job. Employers must carry this coverage, which pays for medical bills and partial wages. Filing a claim to receive benefits can be complicated, and many individuals find it easier when they work with an experienced employment lawyer. 

However, when it comes time to report earnings to the Internal Revenue Service (IRS), many taxpayers may wonder, “Are my Pennsylvania workers’ compensation benefits tax-free? Let’s examine that question, along with factors that may affect other payments an employee receives from their company.

Are Workers’ Compensation Benefits Taxable in PA?

The short answer is no, but there are occasional exceptions. 

Workers’ compensation benefits are generally tax-free under Pennsylvania law. They are not taxed like regular income. The federal tax code 26 U.S.Code §104(a)(1) states: “(a) In general … gross income does not include — (1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness; …”

IRS Publication 525 (page 18) 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.”

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 provide compensation for something lost. This is consistent with the idea that taxes are assessed only against profits and that expenses can be deducted. 

Workers’ Comp Benefits Are Similar to a Personal Injury Settlement

When you suffer any other kind of accident and file a personal injury claim, the point of the settlement for your damages is to “make you whole.” This means returning you to the state you were in prior to the injury as closely as possible. 

Workers’ compensation works in the same manner. You have been physically harmed, and the benefits are bringing you back 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 non-taxable. Federal law allows for other kinds of non-taxable income, including:

• Payments from programs such as SNAP, CHIP, or other programs administered by the Department of Human Services or a public welfare fund
• Settlements or jury awards in personal injury claims
• Disability benefits paid from a no-fault auto insurance policy covering loss of income due to an accident
• Damages paid from a settlement to compensate for the permanent loss of a body part or function

This non-taxable exemption, as it relates to workers’ compensation, covers your medical expenses, which are paid directly by the insurance company, and your wage replacement while you are disabled. Although you are receiving income, it is not taxed since it is to compensate you for the injury you experienced while working.

However, there is an exception to this rule. When an employee is also receiving benefits from Social Security Disability Insurance, a small part of their workers’ compensation benefits are taxable. It allows the government to recover some of the money paid into Social Security for you when you are receiving payments from another source. We’ll discuss more about this exception later.

Consult With Your Attorney and Accountant

Under Pennsylvania law, you don’t have to pay taxes on the workers’ compensation benefits you receive, as a general rule. However, tax laws change almost every year, so it’s advisable that you consult with your tax preparer or accountant to be sure of where you stand.

In addition, maintaining your benefits under workers’ comp can be complicated. It’s a good idea to speak with an experienced workers’ compensation attorney who can guide you through the application process. They can also provide legal representation if your claim is denied or you need to appeal a decision.

Two Examples of Why the Source Matters

As we mentioned, the source of your payments matters as to whether they are taxed. Here are two examples involving payments for sick leave that can help you understand the legal concept.

Officer Speer

The case of Speer v. IRS Commissioner, 144 TC 279 (Tax Court 2015), discusses payments made as part of workers’ compensation. In this case, a detective with over 20 years of service in the Los Angeles Police Department (LAPD) was granted several periods of temporary disability benefits because of various work-related injuries. 

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 the days added during his periods of disability. Officer Speer sought to exclude those payments from taxable income because they had been received under a workers’ compensation act.

The tax court reviewed various California laws and the LAPD collective bargaining agreement. This agreement governed employment conditions between the City of Los Angeles and the Los Angeles Police Protective League. The tax court concluded that sick leave days were controlled by the bargaining agreement and not by California labor laws. 

Since no one could argue that the bargaining agreement 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 Officer Speer’s income and were entirely taxable.

Deputy Givens

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. 

Deputy Givens received workers’ compensation under California law. Everyone conceded that those payments were non-taxable. Deputy Givens also received sick pay, arguing that such payments were non-taxable, but the IRS disagreed.

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

Your Case May Be Unique

As you can see, all payments that fall under the workers’ compensation statutes are considered non-taxable. By contrast, revenues that flow from other statutory or contractual sources often will be deemed taxable. However, there may be specific circumstances in your case that could affect how your benefits are taxed. Consulting with an attorney can help you understand any unusual situations you may face. 

When You Receive Workers’ Compensation and SSDI

Recall that we said there is an exception to the general rule that workers’ compensation benefits are non-taxable. This exception occurs when the worker receives workers’ compensation benefits at the same time they are receiving Social Security Disability Insurance (SSDI) benefits. Under these circumstances, a small portion of the workers’ compensation benefit can be taxed. This is called the “workers’ compensation offset.”

Under Social Security rules, when you receive both workers’ comp and SSDI benefits, 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:

• Your 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 amount, the SSDI payments are lowered until they meet the 80% limit. Because of various rules, the reduced amount 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.

What if There’s 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 don’t 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 Answer Your Workers’ Compensation Questions

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. We are a leading Pennsylvania workers’ compensation law firm with a team of lawyers and staff who will advocate for you.

 

We are dedicated to helping you successfully secure the benefits you are entitled to receive. If you get hurt at work, notify your employer immediately and then contact us for guidance.  Use our online form or call us at 844-243-4849 today.