When you’ve been injured at work, workers’ compensation benefits are often the financial safety net that keeps you going.
They cover medical care, lost wages, and sometimes even a settlement that helps you move forward.
Most types of income in the U.S. are taxed in one way or another. Whether it’s your paycheck, Social Security benefits, or investment income, the IRS usually takes its share. So when workers’ comp payments arrive, it’s natural to wonder: Is workers’ comp taxable, and do you have to pay taxes on workers’ comp?
Workers’ compensation benefits are generally tax-free. That means you can usually count on receiving the full amount of your settlement or benefits without worrying about deductions for taxes. Still, like most areas of the law, there are exceptions, and knowing them can save you from unpleasant surprises.
Our experienced Montgomery workers’ compensation lawyer can help you navigate the situation.
Is a Workers’ Comp Settlement Taxable in SC?
Workers’ compensation benefits are not subject to federal income tax. The IRS excludes workers’ comp payments from taxable income when they are paid under workers’ compensation law. That means whether you’re receiving weekly checks or a settlement, you do not need to report those benefits as income on your federal tax return.
This rule exists because workers’ compensation is designed to help you recover from a workplace injury or illness, not to function as regular income. By keeping these benefits tax-free, the law ensures that injured workers can focus on healing and supporting their families without the added burden of federal taxes.
South Carolina State Tax Rules for Workers’ Comp Settlements
South Carolina law S.C. Code Ann. § 42-9-360 makes it clear that workers’ compensation income replacement benefits are tax-exempt. That means whether you receive weekly checks or negotiate a one-time settlement with the insurance company, those payments are not treated as taxable income by the state.
All benefits provided through South Carolina’s workers’ compensation system are exempt from income tax. This includes medical treatment coverage, vocational rehabilitation, and other forms of assistance tied to your claim.
This ensures that the financial support you receive after a work injury actually goes toward your recovery and daily needs, not toward tax obligations.
Exceptions: When Parts of a Settlement May Be Taxed
While the general rule is straightforward, there are a few specific situations where a portion of your settlement could be taxable.
- Interest on the Settlement: If your settlement is delayed and you are awarded interest on the principal amount, that interest portion is typically considered taxable income.
- Combined Claims: Sometimes, a workers’ compensation claim is settled alongside other legal claims, such as wrongful termination or emotional distress. Any money specifically awarded for non-physical injuries (like emotional distress) or punitive damages could be considered taxable.
- Social Security Disability (SSDI) Offset: If you are receiving both workers’ compensation benefits and Social Security Disability Insurance (SSDI), your SSDI benefits may be reduced or “offset.” If this happens, the portion of your workers’ compensation benefits that caused the reduction in your SSDI benefits may become taxable.
Lump Sum vs. Structured Settlements: Tax Implications
When it comes to workers’ comp settlements, one of the biggest decisions is whether to take a lump sum payment (all at once) or set up a structured settlement (smaller payments spread out over time). Many people worry that their choice will affect whether taxes apply.
The tax rules stay the same. Whether you choose a lump sum or structured settlement, workers’ compensation benefits are not taxable at the federal or South Carolina state level.
Here’s what to consider instead:
1. Lump Sum Settlements
Lump Sum Settlements give you immediate access to your money, which can help if you have big expenses, like paying off medical bills or catching up on household finances.
2. Structured Settlements
Structured Settlements provide steady, predictable payments over time. This can be helpful if you want financial security for the future, or if you worry about spending the lump sum too quickly.
The choice between lump sum and structured settlement comes down to your financial goals, not tax consequences.
How to Report (or Not Report) Workers’ Comp on Your Taxes
You don’t have to do anything at all when it comes to reporting workers’ compensation on your taxes. Since workers’ comp benefits are exempt from both Federal and South Carolina state income tax, they never show up on your tax forms.
That means:
- No 1099 or W-2: You won’t get a tax form for workers’ comp payments because they aren’t considered taxable income.
- No Line Item on Your Return: You don’t need to list your workers’ comp benefits when filing federal or state taxes.
The only time things can get a little tricky is if your workers’ comp interacts with other benefits, like SSDI. In those cases, part of your SSDI could become taxable due to an “offset,” but that’s not because workers’ comp itself is taxed. It’s because of how the benefits overlap.
Contact an Experienced Montgomery Workers’ Compensation Lawyer
When you’re hurt on the job, the last thing you need is confusion about your rights or worries about how you’ll make ends meet. Workers’ compensation laws are meant to protect you and provide for you when you have been injured.
Insurance companies don’t always make it easy when filing a workers’ compensation claim, and mistakes in filing or negotiating can cost you your benefits. This is why it’s important to have an experienced workers’ compensation lawyer.
If you’ve been injured on the job in Montgomery, contact our workers’ compensation attorney at 704-377-9157 to request a consultation.
We will listen to your story, answer your questions, and explain your options clearly. Whether you’re worried about whether your benefits are taxable, need help maximizing your settlement, or are facing pushback from an employer or insurer, we’ll fight to make sure your rights are protected.