The Taxable Difference Between Workers’ Compensation and Disability Insurance

Workers’ compensation and disability insurance both pay in the event of a debilitating injury, so it is easy to think of them as the same thing. But they differ in several very important ways, one of which is whether the government considers them taxable income.

What Are They?

Workers’ compensation pays medical bills and benefits to workers if they have an illness or injury that is caused by their work. Disability insurance pays benefits when the injury or illness is not caused or related to work. You usually cannot receive both benefits at the same time. Disability insurance may be paid to you if your workers’ compensation claim has been denied or delayed, or perhaps if you have an existing work comp claim that has become aggravated by an outside factor.

Who Pays For Them?

Generally, workers’ compensation is insurance that your employer purchases from a private insurance company in order to cover the cost of medical care for their employees if they are injured while performing work-related duties.  The US Department of Labor mandates that employers in all fifty states purchase workers’ compensation.

Disability insurance can be offered and received from the federal government. The Social Security Administration does offer disability insurance on a federal level, but the eligibility requirements are very strict.  A doctor must conclude that your disability has left you unable to work, both inside your normal field of work and outside, for at least a year. On the state government level, each state individually decides whether and what kind of disability insurance they want to offer or mandate that employers offer. Only a handful of states require that employers provide their employees disability insurance.  Most typically, if you have disability insurance, it has been purchased from a private insurance company either by your employer or directly by you. They are not mandatory.

Are They Taxable?

Workers’ compensation payments and benefits are never considered taxable income. This is true even though the premiums are paid for by your employer and not by you.

Benefits from disability insurance may or may not be considered taxable income.  If your employer paid all of the insurance premiums, and they did not include the amount in your gross income, or if your employer paid you benefits directly, they are considered taxable income.  If you paid all your premiums yourself with after-tax income, the disability benefits are not taxable.

If you received either workers’ compensation or disability insurance payments and have questions about their taxability, the professionals at Nielsen Law Group are ready to assist you. Call (480) 888-7111 or submit a web request here.