Statutory workers' compensation payments are exempt from which taxes?

• A. federal income tax only
• B. social security and medicare taxes only
• C. federal unemployment tax only
• D. federal income, social security, medicare and federal unemployment taxes

Answer: (D)

Statutory workers' compensation payments are designed as compensation for job-related injuries, not as wages. Because of that, they are excluded from federal gross income, so they are not subject to federal income tax. They are also not treated as wages for payroll taxes, so they don’t incur Social Security or Medicare taxes. In addition, unemployment tax (FUTA) is a tax on wages paid by employers, not on workers’ compensation benefits, which aren’t wages. So these payments are exempt from federal income tax and from all the payroll taxes mentioned—income, Social Security, Medicare, and FUTA.