Worker's Comp Taxability
4612721
2 Posts
I understand that generally worker's compesation benefits are not taxable. However, if an employer is paying 100% of the premiums on behalf of the employees are the benifits then taxable to the employee? In my company we pay our employees 100% of their pay for the first 6 months of any type of disability. In exchange for this we require an employee to sign over the workers comp payment to the company. Payroll will then deduct out the exact amount of the workers comp payment and replace with a non taxable earning code. This results in the workers comp piece not being taxed while the remainder of the pay being fully taxed.
Comments
If I am understanding your post correctly, you have a STD plan that is reimbursed for the WC wage payments if an employee goes out on a WC injury disability which pays the first 6 months? Is the STD plan self-insured? Or is it a separate STD policy?
In my mind you have three things to look at:
(1) The STD plan contract if it is self-funded or an actual insurance contract
(2) The WC insurance contract -- which is very state specific
(3) The taxability of any wage payments (through either of the above)
Generally, under STD plans, if it is 100% employer paid premiums or 100% self funded by the employer, then yes the employee is fully taxed when they receive the benefits.
If it is not a self-insured STD, you might need to check to make sure that the contract allows for paying employees out on WC issues. Most do not. Subrogation might come into play. Both insurance contracts would have to be written to take this into account.
If it is self-insured and if you are asking whether you are handling it correctly, I honestly don't know if running the WC payments through payroll/company is a good idea or whether it affects the tax status of that amount.
WC is very dependent on state laws. What state are you in? Usually you can setup your WC insurance to take into account the fact that the employer is paying wages for x period of time (basically funding 6 months of wage risk) if you are self-funding the STD payments. By doing so, you might significantly lower your WC premiums....and that could be used to fund/offset the employer taxes on that amount. But it is my understanding that those wages would then be taxable (to both the ee and the er) if the employer is providing the benefit. However it is possible that the employee would still be ahead of 60% of non-taxable wages under an employee-premium-paid STD plan depending on their tax bracket.
One of the reasons that employers/STD plans/WC wages are paid at less than 100% to the employee is because they are non-taxable...so the industry is taking into account that the employee needs less than 100% of pay to live on because the expense of taxes has gone down.
Just some random thoughts....I would consult with both a WC broker, and STD broker and a tax attorney because as a friend on another board likes to say "the devil is in the details"....especially with the issues I listed above and getting the three to work together.
"WC is very dependent on state laws."
"I would consult with both a WC broker, and STD broker and a tax attorney"
Bingo. HRforME clearly knows one or two things about this.
From a process perspective, I would keep in mind whether or not you are a multi state employer and how much time you have to mess with this. If you are, or may become, a multi state employer, then you may want to go with a simpler, more scalable plan.