Are Workers’ Compensation Benefits Taxable?

On Behalf of | Feb 1, 2023 | Workers' Compensation |

Meta description: Employees injured at work are legally entitled to workers’ compensation benefits. Generally, employees won’t have to pay federal or state taxes on those benefits.

With tax time around the corner, now is the perfect time to start sorting out your finances for the year. And if you’re receiving workers’ compensation benefits, you may be wondering how the federal and state government will treat them when it comes to taxes.

We have some good news for you. In most cases, these benefits won’t be taxable. But read on for some exceptions to this rule.

Workers’ compensation payments generally aren’t taxable

For once, here’s some good news on the tax front. Workers who receive workers’ compensation benefits for an injury usually don’t have to pay taxes at either the federal or state level.

And we’ve got even better news: the answer stays the same, regardless of whether your injury is temporary or permanent. Your workers’ compensation benefits are still tax-free.

When do workers’ comp payments become taxable?

If you’re an injured worker who receives not just workers’ compensation but also supplemental security income (SSI), you may end up being taxable. In most cases, the taxable amount would be small.

Now, if you’re receiving Social Security disability while receiving workers’ compensation benefits, it becomes a little more complicated. To a certain extent, your Social Security benefits will be taxable.

If your workers’ comp payments reduce your Social Security payments, the reduction is considered income from Social Security. That means it could be taxable under the law. You can figure out whether it’s taxable by adding half of your Social Security benefits to your other income and determining whether the amount exceeds these thresholds:

·        $32,000 if you are married taxpayers filing jointly

·        $25,000 if you are filing as single, head of household, qualifying widow(er) with a dependent child, or married filing separately who did not live with a spouse at any time during the year

·        $0 if you are married taxpayers filing separately and lived with your spouse at any time during the last year

Going over these thresholds means that the full amount of your Social Security payments is likely taxable—even if reduced by workers’ comp payments.

What happens if I receive other disability benefits?

If you receive Social Security disability insurance payments on top of workers’ comp, your Social Security payments will be reduced. The key is that your combined workers’ compensation and Social Security disability insurance (SSDI) or Supplemental Security Income (SSI) cannot exceed 80% of your average income before your injury. If they do, your Social Security benefits will be offset to meet the 80% threshold. That offset amount may be taxable.

Let’s take an example to see how this works. If your pre-disability income was $2,500 per month. Workers’ comp pays you $1,000 every month. An additional SSDI payment of $1,200 would equal $2,200, or 88% of your pre-disability income. So, your SSDI payment would be reduced by $200 to bring the total amount down to 80% of $2,500, which is $2,000. Plus, $200 of your workers’ compensation payments might become taxable as well if your total income is high enough.

Workers’ comp can be confusing

If you’re receiving multiple payments from multiple sources, it can get pretty confusing. You may need to work with a lawyer to understand the best way to proceed. Reach out to the experienced workers’ compensation lawyers at Hunter & Everage for more help with your workers’ compensation claim.

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