Are Pennsylvania workers’ compensation benefits taxable?

Pennsylvania injured workers may receive wage loss benefits when out of work due to a work injury. Many workers’ compensation cases also end in a settlement, where the injured worker receives a lump sum amount to settle their claim. This is the time of year where I get questions from clients on whether their weekly wage loss checks and their settlement funds are considered taxable income.

The answer is NO. Workers’ compensation benefits are not taxable at the federal or state level. Specifically, IRS Publication 525 address workers’ compensation benefits.

Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they’re paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors. The exemption, however, doesn’t apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

Likewise, workers’ compensation benefits are not taxable by the Commonwealth of Pennsylvania for state taxes.

Disability, retirement or other payments arising under workmen’s compensation acts, occupational disease acts and similar legislation by any government;

It is important to note that these tax exclusions also apply to workers’ compensation settlements as well. Many workers’ compensation cases end in settlement where the injured worker receive a lump sum payment to settle the workers’ compensation case. The entire amount of settlement funds is not taxable.

Finally, it is also important for injured workers to seek professional tax advice. This article is only applicable for tax year 2021. Tax laws change often, which is why professional tax advice should be sought.

If you have been injured at work, it is important to seek experienced workers’ compensation counsel.  The employer and insurance carrier have their own best interest at heart.  That interest is purely in limiting their liability.  Many times, that is quite adverse tot he injured worker.  Mooney Law offers absolutely free consultations for injured workers.  Call today to schedule your free consultation at 717-200-HELP or 717-632-4656.  We stand ready to fight for you.  You can also visit the Mooney Law website.