Moore: Top Workers' Comp Tax Questions

Tuesday, September 19, 2023 | 0

J&L’s corporate tax filing season just ended. Every year, we receive the following workers' comp tax questions from employers, injured employees, claims personnel and financial advisers. Let's cover five of the most popular.

James Moore

Injured employees' question: Do I have to pay taxes on the workers' comp benefits that I received last year?

Let's split that into three answers.

Generally, you do not owe federal tax on workers' comp indemnity or medical benefits that you received until your gainful return to employment. This is one of the reasons workers' comp benefits are usually based on 2/3 of your total wages.

Certain states may tax the benefits. I do not know of any that do presently.

If you are receiving Social Security benefits for the same injury, you could be taxed if the two benefits added together reach a certain threshold. This tax would be a reduction of your Social Security benefits. See the brochure in this link for more info.

Employers' questions: Should we just treat workers' comp as a tax of doing business? Do we cover independent contractors under our workers' comp policy? Do we have to provide all the tax forms that the premium auditor requested for an upcoming visit?

No. One of our old company tag lines used to be "stop just writing checks." Reading your workers' comp policy, having a safety program and understanding your workers' comp premium audit are three quick ways to not treat the insurance premiums as a tax. 

Workers' comp can be a silent budget killer during the year or years this line of insurance is treated as a cost of doing business or a tax. Becoming involved in the process pays, and patience will help lower your premiums eventually. My website contains many workers' comp cost-saving measures.

I added the second question concerning independent contractors due to the IRS’ definitions of an independent contractor. The definition functions as a great place to start when using contractors. Check out this page.

Your workers' comp policy contains a section that addresses this situation. In short, yes, you have to turn over your business’s tax forms to the premium auditor. Provide only the tax information requested for the upcoming visit.

Not cooperating with the audit process can make your company stand out, which is never a great way to introduce or reintroduce your company to the carrier’s audit staff. 

One area that I covered previously is the workers' comp premium auditor taking records offsite including tax forms. Please check out this link for an old article that still applies to the subject.

Claims staff questions: What is included in the workers' comp wage statement? Do I count all taxable wages when figuring the weekly benefit? Do I count the taxable wages if the employee is working for more than one employer?

Over the years, the question that I have heard most from adjuster trainees covers the workers' compensation wage statement used to calculate weekly benefits.

Most workers' comp wage statements provide instructions along with your carrier or third-party administrator's claims-handling manual. The overall answer is any type of employment earnings from any source should be included in the wage statement. You might have to contact the injured employee’s other employers to secure a wage statement from them.

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.