Circumstances Under Which Workers Compensation is Taxable

For many citizens, tax season may feel like harvest time for the government. If you are living on workers’ compensation benefits, any amount of money you lose because of tax returns can have a significant impact. Let’s look at how the government determines whether or not workers’ compensation is taxable, and if so, under what circumstances.

When is Workers Compensation Taxable?

For the most part, workers’ compensation is not taxable income at the federal or state level. The only exception is when a person also gets disability benefits through Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI). There are times when the Social Security Administration reduces an individual’s SSDI or SSI benefits to ensure the combined amount of disability payments and workers’ comp benefits is below a certain limit. This is commonly referred to as workers’ compensation offset.

The amount of taxable workers’ comp is the same amount that social security deducts from your disability payments. For example, if social security reduces your SSDI monthly payments by $250 because of a workers’ compensation offset, this means that the amount of taxable workers’ comp is $250.

Most of the people who are on workers’ comp and social security do not have sufficient taxable income to be indebted to the Internal Revenue Service. Furthermore,  attorneys, like trusted Nassau County workers compensation attorneys, may structure their client’s workers’ comp settlement to limit the offset and reduce taxable income. Therefore, while a share of your workers’ comp could be classified as taxable income, in many cases the taxable workers’ comp is small or non-existent.

When is a Workers’ Compensation Offset Applicable?

If a person is getting both social security disability and workers’ compensation benefits, the combined value of these benefits cannot be more than 80% of their average current income. In many states, social security benefits are reduced until one can no longer go beyond the 80% threshold.

Some states have a reverse offset. This means, instead of reducing social security payments, they reduce a person’s workers’ comp benefits. In these states, social security will subtract payments to dependants, future and past medical expenses, legal costs, and other expenses from a person’s worker’s comp before calculating the offset.

Other Tax Issues That Arise from Workers’ Compensation

Retirement Benefits

Although workers’ comp cannot be taxed, retirement benefits collected on the basis of your age, prior contributions, and years of service, are not excluded from taxation. This applies even when you retire because of an injury or illness that leads to a workers’ comp claim.

Resuming Work

A majority of the people who get workers’ comp resume work eventually. Some may be assigned light tasks while still being entitled to their share of workers’ comp payments. Any income earned while you are receiving workers’ comp payments is classified as taxable income.

Interest Payments

There are some people who receive workers’ compensation payments with interest. This occurs where the insurance company causes a delay or engages in egregious conduct. In such cases, any interest paid is regarded as taxable income.

Survivors’ Benefits

Workers’ compensation payments made to a deceased’s surviving family members is not taxable income.

If you are receiving workers’ compensation benefits but you are not sure whether they are taxable, or suspect that they are being taxed unlawfully, you should consult a workers’ compensation attorney. Your lawyer will advise you on your legal options and can also help you structure your settlement in a way that reduces your taxable income.

Contact our experienced Arizona Estate Planning Attorneys at (480)947-4339.

Thanks to our friends and contributors from Polsky, Shouldice & Rosen, P.C. for their insight into workers compensation cases.