In New Jersey, workers’ compensation benefits cover your medical bills and most (but not all) of your wages or salary if you are unable to work due to a job-related injury or illness. As a result, paying taxes on your workers’ comp benefits could make it difficult to pay your expenses while you recover.
Fortunately, workers’ compensation benefits are not taxable. Neither the New Jersey Division of Taxation nor the Internal Revenue Service (IRS) taxes medical or disability benefits received through workers’ comp. However, there are a few very limited exceptions. And if you are receiving other benefits related to your work injury or illness, you may need to report these benefits to the Division of Taxation or the IRS.
Workers’ Compensation Benefits Are Generally Not Subject to State or Federal Income Tax
As stated by the New Jersey Department of Labor and Workforce Development, “[w]orkers’ compensation benefits are not taxable.” This is based on the language of Sections 54A:6-1 and 54A:6-6 of the New Jersey Revised Statutes, which provide that, “[a]mounts received under workmen’s compensation acts as compensation for personal injuries or sickness,” are, “specifically excluded from gross income.”
Similarly, the IRS states that, “[a]mounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they’re paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.” This covers amounts paid under New Jersey’s Workers’ Compensation Act. So, the general rule at the state and federal levels is that workers’ compensation benefits you receive as a New Jersey resident do not need to be reported as taxable income.
Exceptions to the General Rule
While this is the general rule with regard to income taxation of workers’ compensation benefits, there are some exceptions. For example, if you deducted medical expenses on a prior year’s return (e.g., because your workers’ comp claim was initially denied) and then subsequently received benefits, you may need to report your medical benefits in order to avoid a prohibited double tax benefit.
Also, if you received Social Security disability insurance (SSDI) or Supplemental Security Income (SSI) in addition to your workers’ compensation benefits, then you may be required to “offset” your workers’ compensation coverage against these benefits. If your gross income exceeds a certain threshold, then this offset will result in taxation of your workers’ comp benefits. There is a similar rule for Social Security retirement benefits. As the IRS explains: “If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable.”
Finally, if you received interest for a delayed workers’ compensation payment, this interest is treated separately from your benefits themselves and qualifies as taxable income.
Figuring Out What You Need to Report on Your Income Tax Returns
If you got injured at work, you began receiving workers’ comp benefits right away, and you are not eligible for any other types of benefits, then figuring out what you need to report on your state and federal income tax returns may be fairly simple. However, if any of the exceptions discussed above potentially apply to you, then you will need to be careful to ensure that you accurately report your taxable income and pay what you owe. At Petro Cohen, P.C., we assist our clients with all aspects of their workers’ compensation cases, and we can help you determine if you need to report any taxable income to the New Jersey Department of Taxation or the IRS.
Additional Resources for Injured Workers in New Jersey
In addition to understanding the tax implications of filing for workers’ compensation (and other benefits), there are several other important facts that injured workers in New Jersey need to know as well. For more information about protecting your rights and complying with the law, we encourage you to read:
- Workers’ Compensation Facts You Need to Know
- Common Employer Defenses to Workers’ Comp Claims
- 10 Tips to Win Your Workers’ Compensation Case
Speak with a Workers’ Compensation Lawyer about Your Claim
If you have more questions about claiming or collecting workers’ compensation benefits in New Jersey, we invite you to contact us for a free initial consultation.
In addition to payment for medical services necessary due to an injury at work, all New Jersey workers are entitled to disability benefits meant to compensate you for wages while your injury or illness makes it impossible for you to work.
- Temporary Disability Benefits – You are entitled to up to 400 weeks of tax-free temporary disability benefits, based on 70% of your wage for any medical condition that is either caused or worsened by your employment.
- Permanency Benefits – There are additional workers’ compensation benefits known as “permanency benefits”, which are awarded by a Judge of Compensation based upon medical evidence supporting a measurable loss of physical function. Most work-related surgeries, fractures, dislocations, tears, disc bulges, protrusions, and herniations qualify. These benefits can be pursued up to two years from the last date of medical treatment, even if the person has not pursued workers’ compensation benefits or even if the person no longer works for the employer where the original accident occurred.
- Total Disability Benefits – When your work injury permanently limits the kinds of work you can do or your ability to earn a living, you would receive total disability benefits.
If you or someone you love would like to receive more information on workers’ compensation settlements, wage loss, workplace injuries, wage claims, and how to receive benefits, contact our New Jersey workers’ comp attorneys as soon as possible to schedule your free consultation. Our New Jersey workers’ compensation attorneys at Petro Cohen, P.C. can answer your questions and determine the most efficient way to proceed in order to help you and your family obtain the compensation that you deserve.