Are Workers' Compensation Benefits Taxable in North Carolina?

If you’re hurt or get sick because of your job in North Carolina, you may qualify for workers’ compensation benefits. This insurance covers medical expenses and provides weekly payments to replace part of your lost income while you can’t work.

Because your regular paycheck is taxable, you might wonder: Are workers’ comp benefits also taxed?

Are Workers’ Compensation Benefits Tax-Free?

According to IRS Publication 525, workers’ compensation benefits are not taxable at the state or federal level if they’re paid for a job-related injury or illness.

These benefits are designed to:

• Offer financial relief to injured or sick employees
• Help replace lost income during recovery
• Remove the need to report the benefits as taxable income

When Can Workers’ Compensation Become Taxable?

In most cases, workers’ compensation benefits are not taxable income. However, if you also receive Social Security Disability Insurance (SSDI), your total combined benefits can affect taxation.

Here’s how it works:

• The total amount of your workers’ comp and SSDI cannot exceed 80% of your average pre-disability earnings.
• If the combined benefits exceed that limit, your SSDI is reduced — and that reduced portion may be taxable.

You might owe taxes if:

• Your SSDI benefits, including any payable to family members, exceed 80% of your pre-disability income.
• You receive a lump-sum workers’ comp payment in addition to your Social Security benefits.

If you’re unsure, a tax professional can help you determine whether your benefits are taxable.

Are Workers’ Compensation Settlements Considered Income?

Generally, settlements from workers’ compensation are not treated as income, so they are not subject to income tax.

The IRS exempts payments made under workers’ compensation laws for work-related injuries or illnesses.

Exceptions:

• Interest on the settlement – Interest on a compensation settlement is usually taxable as income.
• Additional benefits – You may owe taxes if you receive a workers’ comp settlement while also receiving SSDI or SSI benefits.

Can You Receive Workers’ Comp and Social Security Retirement Together?

Yes. You can collect both workers’ compensation and Social Security retirement benefits at the same time. Unlike SSDI, Social Security retirement benefits are not reduced because you receive workers’ comp.

In North Carolina:

• Social Security benefits are not taxed at the state level.
• Receiving workers’ comp does not make your Social Security taxable if it wasn’t taxable before.
• You may owe federal taxes on up to 85% of your Social Security benefits if your income exceeds:
  • $25,000 for an individual
  • $32,000 for a married couple

If you’re nearing retirement, speak with a North Carolina workers’ compensation attorney about whether switching from SSDI to retirement benefits makes sense in your situation.

Free Consultation: Call (252) 333-3333 anytime for help with your case.

Key Facts About Workers’ Compensation in North Carolina

Here’s what every employee should know:

• Most employers with three or more workers must carry workers’ compensation insurance.
• Workers’ comp can cover medical bills, a portion of lost wages, and disability benefits, depending on your condition.
• You can receive benefits regardless of who was at fault for the accident.
• You should report any work-related injury or illness within 30 days of the incident.
• Your employer may require you to use a company doctor, but you have the right to request a second opinion.
• Your employer cannot retaliate against you for seeking workers’ compensation benefits.
• You have the right to appeal a denied workers’ compensation claim.
• If your doctor clears you for light-duty or part-time work, you may receive partial wage replacement benefits.

Get Help from an Experienced North Carolina Workers’ Comp Lawyer

Most workers’ compensation benefits are not taxable. But certain situations, especially when you also receive Social Security benefits, can affect your tax status and your total income.

A skilled workers’ compensation attorney can explain your rights, handle your claim, and help you make informed financial decisions.

Hardison & Cochran is an award-winning personal injury law firm with offices in Raleigh, Greensboro, Fayetteville, and Wilmington. Our lawyers have decades of experience in:

• Workers’ compensation
• Social Security disability
• Motor vehicle accidents
• Premises liability
• Defective products
• Other personal injury claims

Contact us: Call (252) 333-3333 for a free, no-obligation consultation about your workers’ compensation case.