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Can the state tax workers’ compensation payments?

On Behalf of | Nov 6, 2019 | Uncategorized |

Injuries are an unfortunate part of employees’ lives. These accidents are more common in certain industries than others, but pretty much every business that operates in North Carolina needs to have workers’ compensation. The law states that any business with a minimum of three employees must have this coverage regardless of whether the organization has classifications as a corporation, limited liability company, sole proprietorship or any other designation.

After sustaining an injury on the job, the employee may not be able to return to work and earn a normal salary for a while. Workers’ compensation provides funds so that the individual can still provide for his or her home life in the meantime. When filing a worker’s comp claim for the first time, a litany of questions will likely arise, and many employees want to ask, “Will North Carolina tax my worker’s comp payments?”

The state does not tax such payments

Worker’s compensation generally provides an injured employee with 2/3 of his or her salary. While it would generally be more desirable to receive the full amount, employees can rest easy knowing that the state will not tax such payments. This provides additional relief with the person knowing that he or she will get to retain the full amount.

This statute comes courtesy of the IRS, which states that worker’s comp payments are fully exempt from taxation. This tax-free status only applies to payments made under the worker’s compensation act or a subsequent statute within that act. This exemption also applies to survivors. If an employee loses his or her life while on the job, then family members would have entitlement to compensation. Any money received through the worker’s compensation act would not go through taxation. This same exemption does not apply to payments made after a worker retires. Pensions based on age or employment length still have taxes applied.