Are workers’ compensation benefits taxable on your Federal and California Income Tax Return? Answer, no, but disclosure is needed in California if workers’ compensation benefits supported your household.
Federal – IRS
(1040 U.S. Individual Income Tax Return)
The Code of Federal Regulations – 26 CFR § 1.104-1(b)excludes from gross income, amounts received under a Workers’ Compensation Act (such as the Longshoremen’s and Harbor Workers’ Compensation Act, 33 U.S.C., c. 18), or under a statute in the nature of a Workers’ Compensation Act which provides compensation to employees for personal injuries or sickness incurred in the course of employment.
IRS Publication 525, 2017, page 18, specifically states, “[a]mounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.” The exemption does not apply to retirement benefits. The IRS confirmed this exemption in IRS Publication 907, 2017, page 4, specifying, “[t]he following payments are not taxable….[w]orkers’ compensation for an occupational sickness or injury if paid under a workers’ compensation act or similar law.” In conclusion, your workers’ compensation benefits are tax free at the federal level.
California – FTB
(540 California Resident Income Tax Return)
Like your 1040 U.S. Individual Income Tax Return, qualifying workers’ compensating is excluded from gross income on your 540 California Resident Income Tax Return, so long as that compensation was received under a statute in the nature of a Workers’ Compensation Act. Note, if any amount of your workers’ compensation supported your household, you must list the source and amount of workers’ compensation on California Form 3506, Part I, as “Unearned Income and Other Funds Received.” See California 540, Form & Instructions, 2017, Personal Income Tax Booklet, page 68. Further, page 69, ibid, explains that workers’ compensation is not “[e]arned [i]ncome.” In conclusion, your workers’ compensation benefits are tax free in California but need to be disclosed if any portion of it supported your household.
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If you have questions, please contact attorney Jonathan Char at (916) 491-4215.
If you have questions, please contact attorney Jonathan Char at (916) 491-4215.
