Within working life, situations can sometimes arise where an employee suffers an injury in the course of the job and is consequently entitled to compensation, a compensation, from his employer. The question that many employers ask themselves is how the compensation should be considered from a purely tax point of view and whether the employee should include the compensation in his return and be taxed for it.
According to practice, the amounts must be taken up for taxation, but for the employer it has some significance if the amount is purely financial damages due to, for example, loss of income or so-called non-profit damages for pain and suffering. The main rule is that financial damages received from employers, and which have a connection with the employment, are taxable.
The employee must include the compensation in the declaration as any other income and is taxed accordingly. The employer, for its part, pays employer contributions on the amount and may make deductions for its costs just as usual. The compensation is also pensionable. When it comes to non-profit damages, the starting point when it is not an employer-employee relationship is that such is tax-free for the recipient and that the payer may not make any deductions from the payment.
However, this is not the case if there is an employer-employee relationship. In these situations, the courts have been strict and judged that even damages that certainly apply to compensation for pain and suffering or injury, but which are paid out by the employer or have a connection to the employee’s service, are of a financial nature.
This applies regardless of whether both parties themselves agree that parts of the compensation are non-profit damages and even if the court accepts that this is the case. Everything must be seen as taxable income for the employee. For the employer, however, the rules for financial and non-pecuniary damages differ to a certain extent. When it comes to financial damages, the employer can deduct the cost, just like a normal wage cost.
Regarding non-pecuniary damages, however, the employer does not have the right to deduct, which follows from a special provision in the income tax act. It can be said that the employer receives an extra penalty when it comes to non-pecuniary damages to an employee. Finally, it should be noted that there is a tax liability for the employee even if the compensation is not paid directly by the employer but from the employee’s own trade union.