Tax Implications of Workers' Compensation

The states that require workers' compensation participation will require participation in one of the following:

• a state insurance pool
• individual insurance
• self-insurance

Generally, small employers will find that the state insurance pool is the least expensive choice. Self-insurance is almost always too great a risk for small employers to bear and is a route typically taken only by the largest employers.

Speaking of risks, if you don't participate in the workers' compensation program in a state where participation is mandatory, you face fines, possible imprisonment, and denial of the right to conduct business in your state.

Primary tax implication. You can deduct workers' compensation premiums and benefit payments as ordinary and necessary business expenses.

Primary salary implication. You don't have any obligation for withholding or FICA on any workers' compensation benefits you pay.