Is Workers’ Comp Taxable In North Carolina?

Workers’ compensation is a system of insurance that’s designed to provide help if you are hurt performing duties at work. Regardless of the type of injury, as long as you were hurt in the course of your usual job duties, you are typically entitled to benefits to assist with medical bills and part of any lost wages. You might get substantial benefits or a lump-sum payment, and it’s reasonable to wonder, “Is workers’ comp taxable in North Carolina?”

There were 52,703 workers’ comp claims opened in North Carolina during the fiscal year 2022-2023. For many workers, workers’ comp benefits are critical to help make ends meet and to help provide financial stability. It’s important to understand whether your workers’ comp benefits are taxable and whether you will pay the IRS when it is time to file your taxes.

Are Workers’ Comp Benefits Taxable?

Generally, workers’ compensation benefits and settlements received through North Carolina’s Workers’ Compensation Act are not taxable by either the state government in North Carolina or the federal government. This includes Social Security and Medicare taxes. Both weekly benefits and a settlement for workers’ compensation are not considered income that is taxable.

The purpose of workers’ comp is to provide financial relief to sick or injured employees and their families, and if these benefits were taxed, it would potentially undermine its intended purpose. The financial benefit you receive is intended to reimburse you for necessary expenses.

However, there are exceptions to the general rule. If you earn interest on a settlement received through workers’ comp, that amount is typically considered income for tax purposes. Also, lost wage compensation is usually taxable since it is considered income replacement due to an accident or an illness.

Also, if your benefits received through workers’ comp reduce your Social Security Disability Insurance (SSDI) or your Supplemental Security Income (SSI), the reduction amount may be taxable.

Since each situation is different, you may want to consult a Certified Public Accountant (CPA) or someone else who is qualified to help with preparing your taxes. In general, a qualified tax professional can further discuss workers’ comp benefits for tax purposes.

Do I Pay the IRS When It’s Time to File My Taxes?

In short, no. Per IRS Publication 525, the amount you get as workers’ comp for a workplace injury or illness is exempt from taxes when paid under a workers’ compensation state statute. This same general principle also means you won’t pay North Carolina state income tax for your workers’ comp benefits.

In theory, you should be in about the same situation financially after your accident as if you continued working. As a result, the workers’ comp insurance carrier won’t send you a tax form at the end of the year like a 1099 or W-2. Taxes are usually not taken from your payments for workers’ comp, and you do not need to claim benefits on your tax returns.

Why Should I Consider Consulting an Attorney After I’ve Filed for Workers’ Comp Benefits?

An experienced workers’ comp attorney can help protect your rights if you are filing for benefits. Some employees are entitled to short-term disability benefits or have pension/retirement benefits. In this situation, your settlement could jeopardize your ability to collect benefits if your underlying assistance isn’t handled properly. Any settlement documents you consider signing should include legal language to protect your rights.

An attorney can provide invaluable assistance in this complex area of law. For help with concerns about workers’ comp benefits and their tax impact, consult an experienced North Carolina attorney. Our office offers no-obligation initial consultations.

FAQs

Q: Why Aren’t My Workers’ Comp Benefits Taxed?

A: Benefits from workers’ comp are provided on a tax-free basis because your coverage lets you get the treatment you require in order to recover from your workplace injury and get back to work when possible. Your workers’ comp wage replacement benefits anticipate the net pay you would have brought home if you were able to work, and you won’t get a tax form. However, if you return to light-duty work without temporary disability benefits, your wages are taxable.

Q: Are Lump-Sum Settlement Payments Taxable?

A: Sometimes, cases can be resolved through a lump-sum settlement payment, and just like regular workers’ compensation benefits, your settlement payment as a lump sum is not taxable.

However, you may want to consult a tax professional if you invest your lump-sum settlement and receive interest or dividends on your investment or if you use settlement funds to pay medical bills not covered by your workers’ comp benefits. They can discuss simplifying your taxes and using your settlement money appropriately.

Q: Should I Itemize My Workers’ Comp Benefits for Tax Purposes?

A: If you itemize your tax deductions, you might be able to deduct some medical bills and expenses that your workers’ comp benefits do not fully cover. If you deducted injury expenses in a past tax year and then got settlement money reimbursement for those medical expenses, that amount could be taxable. It’s important to consult a tax professional for reliable advice about itemizing and deducting medical expenses following a workplace injury.

Q: How Do I File a Workers’ Compensation Claim in North Carolina?

A: Report your workplace injury and get medical treatment from an employer-approved provider (or find an NC medical provider online). You can file a workers’ compensation claim with the North Carolina Industrial Commission within two years after a workplace injury.

Also, an experienced attorney can discuss your benefits claim and the filing process and address any tax questions you may have about your workers’ comp benefits or settlements.

Contact Ayers, Whitlow & Dressler to Discuss Workers’ Compensation Benefits & Settlements

If you have further questions about the state or federal taxability of your workers’ comp benefits, the skilled attorneys at our firm are ready to provide reliable legal information. We know this area of law can be quite confusing, and while you focus on your medical recovery, let us help you deal with the legal issues related to your financial recovery.

Our law firm is conveniently located off I-277 in a bustling Charlotte neighborhood, and we have plenty of client parking. Contact Ayers, Whitlow & Dressler to schedule an initial client consultation right away.