Unemployment vs. Workers Compensation - Which is taxable?

Have you ever received Unemployment payments or Worker's Compensation for a job related injury?

Did you know that one of these payments is taxable and must be reported on your tax return?

Do you know which one that is?

Well the answer is Unemployment compensation is taxable income.

Please note that under Obama's recovery plan, for the tax year of 2009, the first $2400 of unemployment will be exempt from taxation.

The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of the unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not withheld from the employee’s wages.

In general, the Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law. Unemployment insurance payments (benefits) are intended to provide temporary financial assistance to unemployed workers who meet the requirements of state law.

And since you, as the employee, do not pay the unemployment taxes, then this becomes basically free money to you and therefore becomes taxable on your return.

For additional information, visit the Department of Labor’s Web site under the listing of Unemployment Insurance Tax Topics.

Worker's Compensation is never taxable since is a payment for loss of wages due to personal on the job injury or illness.

The Department of Labor's Office of Workers' Compensation Programs (OWCP) administers four major disability compensation programs that provide wage replacement benefits, medical treatment, vocational rehabilitation and other benefits to federal workers or their dependents who are injured at work or who acquire an occupational disease.

Individuals injured on the job while employed by private companies or state and local government agencies should contact their state workers' compensation board. The Department of Labor has several programs designed to prevent work-related injuries and illnesses. You may obtain information about these programs by visiting Find It! By Topic Workplace Safety & Health page.