Is Worker's Comp Tax Deductible?

Business Taxes

Business owners can deduct the costs of required insurance payments if they are necessary for their business operations. According to the federal tax code, incidental insurance payments are deductible expenses for employers as costs incurred in the ordinary course of business. Business owners can deduct the costs of their insurance payments on their Schedule C, Profits and Losses.

The IRS allows business owners to deduct the costs of workers' compensation insurance premiums that are required by state law and provide benefits to injured benefits without regard to fault. Since most states allow employers to waive self-coverage, employers who optionally purchase self-coverage can deduct the costs of their self-coverage premiums.

Exclusion From Income

Taxpayers can exclude their workers' compensation benefits from their annual tax returns but they may not deduct them. The IRS allows injured workers to exclude their wage replacement workers' compensation benefits if they were paid pursuant to state laws. Furthermore, the IRS limits the tax exclusion to workers' compensation awards. Thus, an employee who retires from his job because of a debilitating and permanent injury cannot deduct retirement pension payments or exclude his retirement benefits. If he does not receive workers' compensation benefits pursuant to his state workers' compensation system, he may not exclude his retirement benefits from his tax returns. However, if he stops working because of a permanent injury and retires pursuant to his state workers' compensation system, he can exclude his workers' compensation benefits.

Exceptions

The IRS requires taxpayers to count their workers' compensation benefits as income if they continue to work modified or light-duty shifts while receiving reduced weekly benefits. Under the Internal Revenue Code, these payments are not excluded benefits but a continuation of paid wages. Employees must pay income taxes on their wages.

Considerations

Since tax laws can frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.