Workers’ compensation benefits are generally not taxable in North Carolina.
If you are a North Carolina worker who suffers an injury or illness related to your job, you may qualify for workers’ compensation benefits. Employer-provided workers’ compensation insurance pays the cost of medical care and provides weekly checks to replace a portion of your lost income while you are unable to work.
Since regular earnings from the job are taxable, injured workers might wonder if their workers’ compensation benefits are also subject to state and federal taxes.
Are Workers’ Compensation Benefits Taxable in North Carolina?
According to the Internal Revenue Service (IRS), workers’ compensation benefits are not subject to federal or state income taxes if you receive the benefits due to an employment-related injury or illness. There are several reasons why workers’ compensation benefits in North Carolina are exempt from state and national taxation.
- Provide maximum financial relief to an injured or sick employee
- Help maintain income flow to the employee
- Remove the strain of completing tax forms on received benefits
When is Workers Compensation Taxable?
Workers’ compensation benefits are typically not taxable income. However, there are some instances in which workers’ compensation benefits could affect the amount of Social Security disability benefits you receive.
If you receive workers’ compensation and Social Security Disability Insurance (SSDI) benefits, the total amount of the benefits cannot exceed 80% of your average earnings prior to your disability. If the total amount exceeds 80%, then your SSDI benefits will be reduced until the month you reach full retirement age.
You could owe taxes on a portion of your workers’ compensation benefits if:
- Your monthly SSDI and any benefits payable to your family members exceed 80% of your average pre-disability earnings.
- You receive a lump-sum workers’ compensation benefit or other disability payment in addition to your Social Security benefits for you and your family.
These situations are for informational purposes only. If you have questions about a specific situation, a tax professional can provide guidance about whether your workers’ compensation payments are taxable.
Are Workers’ Compensation Settlements Considered Income?
Generally, workers’ compensation settlements are not treated as income, so recipients do not have to pay state or federal income tax on them. According to the Internal Revenue Service (IRS), the amount you receive as workers’ compensation for a work-related illness or injury is fully exempt from taxes if paid under a workers’ compensation statute, per IRS Publication 525. This general principle also applies to North Carolina state income taxes. However, there are specific circumstances that require you to pay taxes on a workers’ compensation settlement:
- Interest on the settlement: Interest on a compensation settlement is usually taxable.
- Additional benefits: You might owe taxes if you receive a workers’ compensation settlement in addition to Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits.
Can I Receive Workers’ Compensation Payments if I Also Draw Social Security Retirement?
You can receive both workers’ compensation and Social Security retirement benefits simultaneously. When you collect both, there is no required deduction in the amount of Social Security benefits you receive to reach a pre-injury wage level as there is if you’re collecting SSDI. For this reason, many people receiving workers’ comp wage benefits consider collecting their Social Security retirement benefits, rather than SSDI, as soon as possible. This eliminates any offset they might be paying because they’re collecting workers’ comp and SSDI simultaneously.
In North Carolina, Social Security benefits are not taxed. Receiving workers’ compensation does not make your Social Security benefits taxable at the federal level if they weren’t before. Still, if your Social Security income exceeds $25,000 for an individual or $32,000 per couple, you might be required to pay federal income taxes on up to 85% of your Social Security benefits.
To understand your eligibility for workers’ compensation benefits, you should talk with an experienced North Carolina workers’ compensation attorney. An attorney at Hardison & Cochran can advise you about whether it is advantageous for you to convert from Social Security disability to Social Security retirement benefits if you are eligible.
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What You Need to Know About Workers’ Compensation Benefits?
Regular earnings from the job are taxable, but workers’ compensation benefits for a job-related injury or illness are usually not taxable. Here are some other things you should know about workers’ compensation benefits:
- With a few exceptions, North Carolina employers with more than three employees must offer workers’ compensation benefits.
- Workers’ compensation in North Carolina covers medical bills, a portion of your lost wages, and disability benefits, depending on your condition.
- You can receive workers’ compensation regardless of who is at fault for your work-related injuries.
- You should report any work-related injury or illness within 30 days of the incident.
- Your employer can require you to use a company doctor to treat job-related injuries. But you have a right to request a second opinion.
- Your employer cannot retaliate against you for seeking workers’ compensation benefits for injuries related to your job.
- You have a right to appeal a denied workers’ compensation claim.
- You can earn partial wage replacement benefits if your doctor clears you for light duties or part-time work.
Get Professional Help from Workers’ Comp Attorney
Although workers’ compensation benefits, including settlements of workers’ compensation claims, are generally not taxable, specific circumstances, such as receiving Social Security Disability benefits, can affect your tax status. A workers’ compensation attorney with Hardison & Cochran can help you understand your rights if you get hurt or sick on the job. We can clarify the complexities of your claim and guide you through the legal processes.
We are an award-winning personal injury law firm with locations throughout North Carolina, including Raleigh, Greensboro, Fayetteville, and Wilmington. Our dedicated and compassionate lawyers have decades of legal experience handling claims involving workers’ compensation, Social Security disability, premises liability, motor vehicle accidents, defective products, and more. Let us help protect your rights if you get sick or hurt on the job.
Contact us at (252) 333-3333 for a free, no-obligation consultation about your workers’ compensation case.