Say you had a tough year. You unexpectedly get hurt while working and end up having to face the stack of paperwork just to file for and earn Workers’ Compensation Benefits. Sadly, you’re now faced with a different dilemma. It’s a question you never thought of before getting hurt and dealing with your recovery process. So, you pick up the phone and type your question into your trusted search engine, Google:
“Is Workers’ Compensation taxable?”
It was a smart move to Google that question, and you’ve come to the right place, as the Law Offices of Craig Altman has the answers you’re looking for regarding workers’ compensation.
Workers’ Compensation Benefits Are, in Fact, Tax Exempt
Generally speaking, workers’ compensation isn’t taxable. According to the Internal Revenue Service (IRS), “Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute like a workers’ compensation act.”
At a state or federal level, workers’ compensation benefits, mostly, are not taxable. Non-taxable income and workers’ compensation fit into the same category:
- Public welfare fund payments;
- Compensatory (but not punitive) damages for sickness or physical injury;
- Disability benefits that fall under a “no-fault” car insurance policy for loss of income or earning capacity as a result of injury;
- Compensation for indefinite loss of physical body function, permanent disfigurement, or loss of physical body function.
In simple terms, workers’ compensation benefits from a work injury are tax-exempt for federal income tax purposes. Survivors are exempt for the same reason when it comes to payments.
The Exception to the Rule
However, there is an exception to the rule. Say a hurt employee earns Supplemental Security Income (SSI) in addition to their workers’ compensation; the given supplemental earnings can be taxed. If you also earn Social Security Disability Insurance (SSDI), a small amount of your workers’ comp benefits can be taxed.
If you also receive Social Security, your Social Security benefits may be reduced, and the remaining portion of your workers’ compensation payment may be taxable. There’s still a caveat, though. The amount you earn does matter when it comes to taxes. The amount, however, would be small enough to be negligible for taxation, in most cases, however.
SSDI Benefits
If you cannot work due to disability, there are a few things you should know about your Social Security options.
Will SSDI be Taxed?
As we all know, tax season is a stressful and dreadful part of the year for most people. You may ask whether your disability is taxable, and the answer depends on a few factors.
The Details on When and How Workers’ Comp is Taxable
Let’s begin with the fundamental question: did you get hurt at work? Remember, workers’ compensation benefits are usually not considered taxable at the federal or state level. The exception is when someone also collects disability benefits through SSI or SSDI. In this rare situation, the Social Security Administration (SSA) might reduce a person’s SSI or SSDI so the total of disability payments and workers’ compensation stays under a certain threshold. This reduction is known as a workers’ compensation offset.
This means the bulk of taxable workers’ compensation equals the amount SSA reduces from your disability payments.
If Social Security decreases your monthly SSDI check by, say, $250 due to the workers’ compensation offset, that means that $250 of your workers’ comp benefits are taxable.
Taxable Income has a Threshold
Many people who earn Social Security benefits and workers’ compensation benefits don’t receive the correct amount of taxable income that would apply as federal taxes. This means that even if a few of your benefits are taxable, there is a small chance that you will owe taxes on your tax return.
Plus, an established and reputable New Jersey workers’ compensation lawyer can help you structure your workers’ compensation settlement to lessen the offset and cut down your income that’s taxable. So if you do fall into the category of people who apply and consider a specific amount of their workers’ compensation taxable income, there are lawyers who can help you through the process and prevent you from having to pay taxes on your benefits.
At What Point Does the Workers’ Compensation Offset Apply?
Time to do some math. If you are collecting both workers’ compensation and Social Security Disability, the joint amount cannot go above 80% of your average current earnings. Your “average current earnings” are described as the largest of:
- the median monthly payment used to compute your benefits
- one-sixtieth of your total payments for your highest-gross five years in a row, or
- one-twelfth of your total earnings from your highest-wage year out of the following five.
Many states handle this by decreasing your Social Security payments until you no longer go above the 80% amount. Some states have a “reverse offset,” though, where your workers’ comp wages are diminished.
Other Fees Added in
There are other miscellaneous details and fees to note. For instance, SSA does not include legal fees, past or future medical expenses, dependent payments, or other workers’ comp costs before applying the offset. You or your attorney must notify Social Security of these expenses and include proper documentation.
If for some reason you earn a lump sum workers’ comp settlement, Social Security will divide the amount after subtracting charges to figure out your monthly percentage.
Lessening Taxable Earnings From a Workers’ Comp Settlement
It’s essential that your workers’ compensation lawyer structures your settlement to reduce your offset. This will also prevent a tax burden.
The most common way to reduce the tax burden is for the settlement agreement to state that the lump sum should be treated as if it were spread out over an expected lifetime. By doing this, you could still collect a lump sum, rather than small recurring payments, but the lump sum is applied towards the remainder of your lifespan. Make sure the monthly rate is included in your settlement agreement.
If you have more questions or need a workers’ compensation attorney, the Law Offices of Craig Altman is proud to help injured workers and is here to assist.
Note: In some states, the settlement can only be divided through your retirement date, not the remainder of your life. Either way, a short and hefty settlement agreement can exclude your tax liability for workers’ comp benefits.
