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While every state operates under different workers comp laws
and regulations, most employers are required to carry workers comp coverage. It
typically pays two-thirds of your regular income, and workers comp benefits
cover medical treatment associated with work injuries.
Workers comp is usually temporary, but you can receive it
for an extended time period depending on the injury you sustained. If you are
injured and can no longer work, workers comp may cover job training and job
search expenses.
Whether you received workers comp benefits in 2014 or are
you currently receiving benefits, you'll want to know if those checks are
considered taxable income. This information helps you prepare to file taxes
this year and decide if now's a good time to buy a house or vehicle.
What are the IRS Rules?
In general, the IRS does not consider workers comp benefits
to be taxable income. According to IRS Publication 525, "Any amount an
employee receives as workers' compensation is fully exempt from tax if they are
paid under a workers' compensation act or a statute in the nature of a workers'
compensation act."
What do Lenders Think?
Mortgage companies and auto lenders look closely at your
income as they determine your eligibility for a loan. However, they typically
will not count your workers comp benefits as income, especially if you still
have your job and your rehab and recovery time is short. In this case, they may
use your regular income to decide if you're a good credit risk.
If you'll be off work for a long time period, lenders may
look at your credit score to determine if you're a good loan candidate. It
definitely pays to keep that score up at all times, including as you receive
workers comp benefits.
Understanding whether or not workers comp benefits are
taxable income helps you during tax season and as you purchase a home or
vehicle. Although these benefits are usually not considered taxable income,
discuss the details of your specific case with your human resources manager,
insurance agent or accountant.