Are Workers' Compensation Benefits Taxable?
Workers' compensation claims are a common concern for many workers injured on the job. This system pays workers' comp payments for lost wages and medical expenses, often paid through a workers' compensation settlement. This could be a weekly wage, a lump sum, or a combination. Now, a big question is: Are these benefits taxable?
In general, workers' compensation benefits are not taxable at state or federal levels. Regardless of what type of benefit (including death benefits, disability payments, workers' comp settlements, etc.), they are generally not taxable. This typically means you will not have to include these benefits when you file a tax return. It is as if the money you get from the insurance company through your compensation insurance is tax-free. However, there are some exceptions.
This article provides a brief overview of workers' compensation claims and taxes.
Understanding Workers' Compensation and Taxes
Most workers' compensation benefits are not taxable at the state or federal levels. However, some of your workers' comp benefits may be taxed if you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). To learn more about the difference between the two, visit FindLaw's What's the Difference Between SSDI and SSI? page.
Workers' compensation is in the same category of non-taxable income as the following:
- Payments from public welfare funds
- Compensatory (but not punitive) damages for physical injury or sickness
- Disability benefits under a "no-fault" car insurance policy for loss of income or earning capacity as a result of injuries
- Compensation for permanent loss or loss of use of a part or function of your body or your permanent disfigurement
Put another way, for federal income tax purposes workers' compensation awarded under a workers' compensation act or statute due to work-related sickness or injury is fully exempt from tax. Payments to survivors under the same circumstances are also exempt.
Exceptions to Tax-Exempt Status
While it is usually true that workers' comp benefits are tax-free, there are certain situations when some of your benefits may be taxable. This is why it's always a good idea to get legal advice from a workers' compensation attorney to understand your case.
For instance, if you receive SSDI benefits, some of your workers' comp benefits might be taxable. If the injured worker receives supplemental security income on top of workers' compensation, they may have to pay taxes. Payments coming from Social Security would be reduced. The difference created by the payment of workers' compensation would be taxable. In most cases, however, this amount could be small enough to be negligible for taxation.
The same is true if you receive retirement benefits from a retirement plan funded by your employer. It is about ensuring your average current earnings are what you made before you were injured or became ill. If the compensation claim was held up due to a lawsuit and the court approves a settlement, an accountant or tax attorney may need to structure the payment to minimize taxation. This also goes for situations in which a taxpayer decides to retire while still receiving workers' compensation payments.
Social Security and Workers' Compensation Benefits
According to the Internal Revenue Service (IRS) and the Social Security Administration (SSA), if your workers' compensation settlement and your SSDI benefits combined exceed 80% of your average current earnings before you became disabled, a portion of your benefits may become taxable, also called the offset amount.
You can use the standard formula for Social Security benefits to calculate your payment. Add half of the total Social Security benefits to your other income. Some of your benefits may be taxable if:
- That amount is more than your base amount of $25,000 for taxpayers filing as single, head of household, qualifying widow(er) with a dependent child, and married filing separately who did not live with a spouse at any time during the year
- $32,000 for married taxpayers filing jointly
- $0 for taxpayers filing as married filing separately who lived together at any time during the year), as some of your benefits may be taxable.
If this is your situation, the IRS will tax you on the total Social Security benefit amount, even if workers' compensation has reduced it.
Collecting Social Security Benefits and Workers' Compensation Simultaneously
If you are collecting Social Security retirement benefits and workers' comp benefits at the same time, things can get tricky. This is known as the "workers' compensation offset." The SSA will reduce your benefits, as discussed above. If this happens, your workers' comp may become taxable.
This situation may arise if the health condition of a taxpayer who was injured in the workplace fails to improve; if the worker becomes disabled, they may receive disability insurance and workers' compensation payments at the same time.
Learn More about Workers' Comp Benefits from an Attorney
Workers' compensation cases can be complex. Each individual's tax situation may be different. A workers' compensation lawyer can provide valuable legal advice. They can help you understand your eligibility and rights. Remember, wage loss due to a workplace injury should not lead to financial stress. With the help of a skilled attorney, you can obtain a workers' compensation settlement. They can help you avoid any unpleasant tax surprises.
The workers' compensation system provides a method to receive compensation for work-related injuries. However, things can still get pretty complicated, especially if your injuries are severe. If you receive benefits, you may need a skilled tax attorney to guide you through the tax process.
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Contact a qualified workers' compensation attorney to make sure your rights are protected.