Are Workers' Compensation Benefits Taxable?
Most workers' compensation benefits are not taxable at the state or federal levels. However, a portion of your workers' comp benefits may be taxed if you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).
Workers' compensation is in the same category of non-taxable income as the following:
- Payments from public welfare fund;
- Compensatory (but not punitive) damages for physical injury or sickness;
- Disability benefits under a "no fault" car insurance policy for loss of income or earnings capacity as a result of injuries;
- Compensation for permanent loss or loss of use of a part or function of your body, or for 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 are fully exempt from tax. Payments to survivors under the same circumstances are also exempt.
Exception to Tax-Exempt Status
If the injured worker receives supplemental security income on top of workers' compensation, he or she may have to end up paying taxes. Payments coming from Social Security would be reduced and 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.
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 for the purpose of minimizing taxation. This also goes for situations in which a taxpayer decides to retire at the same time he or she is still receiving workers' compensation payments.
Social Security and Workers' Compensation Benefits
Specifically when you receive both Social Security Disability and Workers Compensation benefits the Social Security benefits are taxable to a certain extent.
If part of your workers' compensation reduces your Social Security, that part is treated as Social Security income and could be taxable. You can use the normal formula for Social Security benefits to calculate what your payment might be: add half of the total Social Security benefits to your other income. Some of 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; and
- $0 for taxpayers filing as married filing separately who lived together at any time during the year), some of your benefits may be taxable.
If this is your situation, then the Internal Revenue Service (IRS) will tax you on the full amount of the Social Security benefit, even if it has been reduced by Workers Compensation..
In What Context Could I Be Collecting Social Security Benefits and Workers' Compensation Concurrently?
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, he or she may receive disability insurance and workers' compensation payments at the same time. When this happens, the Social Security Administration will reduce its payments to a certain level and the difference created by the workers' compensation paycheck becomes taxable.
Get a Free Consultation from a Workers' Compensation Attorney
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 your claim is denied or you fail to receive compensation, you may need skilled legal assistance. Fortunately, you can have your claim reviewed for free to help determine your next steps.