Will Your Workers’ Compensation Benefits Be Taxable?

Many workers' compensation benefit recipients wonder if their benefits are taxable like other forms of income.

Generally, workers' compensation benefits are classified as a non-taxable income.

There is, however, one exception.  If your workers’ compensation claim involved a Labor Code Section 132a action for discrimination, you may incur a tax obligation.  A Labor Code Section 132a action allows you to seek benefits such as lost wages and other benefits  if you are wrongfully terminated or otherwise discriminated against. 

If you are able to try and be awarded back pay or back benefits , back pay would be considered taxable.  Further, other benefits, such as payment of a bonus, would also be considered taxable.

If a Labor Code Section 132a claim is settled, some Defendant’s request that a portion of the settlement be considered as payment of wage and therefore be considered taxable income.   In those circumstances, a skillful attorney can work on limiting tax exposure.   Usually, you will receive a 1099 tax form from your employer in those circumstances.  It is very important that you consult an accountant or tax preparer to ascertain the amount of taxes you will owe.  If you do owe money, it is recommended that you set aside some money so that you can make your tax payment.