Typically, in New York, workers that receive benefits from workers compensation due to an on the job injury are not subjected to taxes at the federal, state, or local levels.
Workers compensation benefits for work injuries are tax exempt if they are paid under the workers compensation act and also includes the survivors that receive benefits for fatal injuries.
However, as with many rules there are exceptions. If you are receiving benefits for workers compensation and disability benefits from Social Security, there may be a tax responsibility involved on your part.
When Workers’ Comp Benefits Could Be Taxed
When you receive both Social Security Disability and Workers Compensation benefits then Social Security benefits are taxable to a certain extent. If you receive both Social Security disability benefits and Workers Compensation, then Social Security may be reduced by a certain amount due to your receipt of Workers Compensation benefits (you can only receive up to 80% of your pre-disability earnings form both sources, otherwise, Social Security reduces its benefits).
If this is your situation, then the IRS will tax you on the FULL amount of the Social Security benefit, even if it has been reduced by Workers Compensation.The Internal Revenue Service (IRS) has confirmed this in its widely used Publication 17 that helps explain a multitude of issues, including the Workers Compensation Benefit Non-Taxability:
“Amounts 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 also applies to your survivors. The exemption, however, does not 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.”
“If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits.”
Therefore, it is always in your best interest to consult with your tax professional, but be assured, your workers compensation is non-taxable (whether weekly payments, lump-sums, or medical payments).