While most forms of income are subject to tax by both the New Jersey Treasury and the Internal Revenue Service (IRS), workers’ compensation benefits are one important exception to this general rule. As a result, in the vast majority of circumstances, workers’ compensation benefits are not taxable under state or federal law.
Workers’ Compensation Benefits Are Exempt from New Jersey Income Tax
Under the New Jersey Gross Income Tax Act, “[a]mounts received under workmen’s compensation acts as compensation for personal injuries or sickness,” are “specifically excluded from gross income.” N.J.S.A. Section 54A:6-1 This means that workers’ compensation is not subject to income tax in New Jersey.
Workers’ Compensation Benefits are Exempt from Federal Income Tax
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 are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.” IRS Publication 525 As a result, workers’ compensation benefits are also exempt from tax on your federal returns.
Exception: The Social Security and Supplemental Security Offset
However, there is one situation where workers’ compensation benefits may be taxable. This situation arises if you receive disability benefits through Social Security disability insurance (SSDI) or Supplemental Security Income (SSI) in addition to receiving workers’ compensation. If you receive workers’ compensation and SSDI or SSI and your income is over a certain threshold, then you may have to pay tax on your workers’ compensation benefits. Your tax obligation will also depend on the type of workers’ compensation benefits (temporary or permanent, partial or total) you receive.
As you can see, the tax rules for workers’ compensation and SSDI/SSI are complicated, and understanding your tax obligations requires a thorough understanding of both your financial situation and the federal and state laws that apply based upon your personal circumstances. There may also be ways to structure your workers’ compensation benefits in order to minimize your tax burden.
Taxable Income Separate from Workers’ Compensation
It is important to keep in mind that you may receive income separate from your workers’ compensation benefits that are still subject to tax. For example, the following income and benefits will generally need to be included in your reported taxable income.
– Retirement benefits, even if you retire due to a work-related injury
– Interest paid on delayed benefits
– Income you earn from working while also receiving workers’ compensation
You can find more information on the Social Security Administration’s Web site; or, you can contact us for a free consultation.
Schedule a Free Consultation with a New Jersey Workers’ Compensation Lawyer
At Petro Cohen Petro Matarazzo, we provide experienced, personalized legal representation for injured workers in New Jersey. If you have questions about filing for workers’ compensation or need help figuring out if you owe tax on your workers’ compensation benefits, you can call or email us for more information.