Should you be unable to work due to injury or illness, you can receive workers’ compensation, which provides you with a wage to survive until you are well enough to return to work. Finding out if this money is taxable or not can be tricky, especially if you have never received workers’ compensation before.
Our brief guide below tells you everything you need to know about reporting workers’ compensation on your tax return to ensure you correctly file your tax returns.
What Is Workers Compensation?
Workers compensation is a broad term that applies to any compensation you receive while you cannot work. This could be WorkCover or a lump-sum payment that provides you a wage while you cannot work. The compensation might be a temporary measure if you cannot work for three months or a long-term solution, like a lump sum payment after an injury at work.
Can I be Taxed On My Worker’s Compensation?
While worker’s compensation is not considered a wage, it can be taxable. Below are the two common workers’ compensations and whether you need to pay tax on them.
- WorkCover – weekly payments from WorkCover are taxable and treated like a salary. They must be declared on your annual tax declaration too
- Lump sum payout – a one-off payment is not taxable as the money compensates for a permanent impairment. Any legal fees that occurred while claiming this compensation can be tax-deductible
When placed in WorkCover, it is important to consider the taxes you will pay into your budget. The money will be regularly paid to you, but you must ensure you have enough to survive until you can return to work. You can access additional support if needed or seek financial advice for further guidance.
How Do I Know What Workers Compensation I Will Receive?
The injury and time off from work to recover often determine the type of compensation you will receive. WorkCover is provided when you need time off work to recover from stress or other injuries but will be able to return. These will take the form of regular payments that are generally between 80% and 85% of your usual wage.
This money will continue until you are fit to return to work, at which point it will stop, and your usual wage will be paid instead.
Your doctor assesses injuries that cause permanent impairment. They will determine whether you can return to work before you can move forward and make a claim against your employer. A solicitor can help you do this to ensure that you receive the right amount of compensation, covering the loss of future earnings and any medical expenses you might have incurred.
This payment is processed as a one-time payout, with no future compensation provided, as the amount should be enough for you to live off.
How Do I Report Worker’s Compensation On My Tax Return?
Reporting workers’ compensation on your tax return is straightforward and should be done at the end of the financial year. You must declare the amount you have received in workers’ compensation payments, whether this was through income protection or a workers’ compensation scheme.
When reporting your worker’s compensation on your tax return, consider the following:
- Have you made a claim and agreed to settle, or had a court order made in your favour? This money is not taxable
- Have you withheld or included tax from your worker’s compensation payments on your tax return? They do not need to be included in this return
- Are you unsure whether the compensation must be listed? Seek advice from an accountant who will know what money should be declared
Can I Claim Tax Deductions While On Worker’s Compensation?
You can claim a few deductions while you are on workers’ compensation. These can be filed with your tax return, allowing you to claim some money back while you cannot work, like for medical appointments or other travel costs.
You can claim tax deductions if you need to provide a medical certificate to receive your payments and any travel expenses related to getting this certificate. This includes driving or taking public transport to your doctor, trips to a hospital, or any appointments with other medical professionals, like occupational therapists.
These travel costs are based on cents per kilometre for the distance travelled or any bus and taxi fares you might have paid. Again, your accountant can help you if you need help processing the claim or how much money you can claim as a deduction.
Final Thoughts
Regular workers’ compensation payments while you are unable to work are taxable and must be declared on tax returns. However, you can claim some expenses, including travel costs, as tax deductible to help you recoup some of this money.
Guest writer.
