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Income Tax Law and Workers' Compensation Benefits and Awards
Workers' compensation wage loss replacement benefits are not taxable or reportable under federal or state income tax laws.
Wage continuation by the employer after a work injury, if available, is often taxed as regular income; however, that part of wage continuation that otherwise would be paid as workers' compensation wage loss replacement is not taxable. Most employers offering wage continuation do not separate taxable and non-taxable compensation payments on W-2 forms. In such a scenario, an injured worker must look to Notices of Decision filed by the Workers' Compensation Board, which usually set forth the periods and amounts of employer reimbursement or credit for wage continuation. The amount reimbursed or credited to the employer represents the amount the injured worker is able to deduct from W-2 gross wages to determine income tax for the year involved. It is sometimes necessary to file an amended tax return if the Notice of Decision is not filed by the Board until after an income tax return is filed for the year involved.
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