Per IRS Publication 525, any amounts paid under a Workers’ Compensation act or a statute in the nature of a Workers’ Compensation act are exempt from tax. It is important that any NYS employees out on Workers’ Compensation leave are coded as such to ensure that the tax-free benefit is issued.

When an employee is coded under a paid Workers’ Compensation leave in PayServ, taxes will continue to be withheld from their paychecks initially. The Workers’ Compensation tax exclusion program reviews these paychecks and retroactively generates taxable wage adjustments that create tax refund checks for Federal, State, and SS/Med (FICA) taxes. 

The tax exclusion program operates on a six-week lag to allow agencies extra time to enter the proper transactions in PayServ, as Workers’ Compensation related transactions are often entered retroactively due to factors such as late notification, late acceptance by the Workers’ Compensation Board, etc. The Workers’ Compensation Tax Refund Schedules outlines the schedule that employees can expect to receive tax refund checks.

Erroneous Workers’ Compensation Tax Refund Checks:

If a transaction returning an employee from paid Workers’ Compensation leave was entered late, resulting in the employee receiving tax refund checks they were not entitled to, the employee should cash those checks. A future Workers’ Compensation Clean Up will identify the late entry, complete the necessary taxable wage adjustments, and generate an SS/Med deficiency to recover the SS/Med refunds that should not have been issued. The Federal, State, and Local wages will be adjusted but the taxes will not be. Employees may want to consult a tax professional if they are concerned about underpayment. 

OSC is unable to accept returned Workers’ Compensation tax refund checks. Reversing a Workers’ Compensation tax refund check via AC-230 interferes with the taxable wage adjustments that may be completed by the Workers’ Compensation Clean Up process. 

Last Updated: September 2026