Your workers comp benefits are designed to replace your income…
…but is workers comp taxable?
You already know that you have to pay taxes on most forms of income: salary, inheritance, lottery winnings, and even game show prizes. But where do your workers’ comp payments come in?
Workers’ compensation payments are designed to replace any wages you might have lost as a result of a workplace accident or illness, but these benefits are a significant reduction from your previous paycheck. Will you have to give Uncle Sam his cut and lose even more money?
In short, you want to know: “is workers compensation taxable income?” The short answer is ‘no’, workers compensation benefits are not taxable. But we need to explain it to you in depth because there are some exceptions.
Is Workers Comp Taxable?
Workers comp payments—including death benefit payments—are not subject to state or federal taxes. (Workers comp will not even send out a W-2 at the end of the year.) So while your workers comp benefits might not be as much as your paycheck, you can comfort yourself with the knowledge that they will not be reduced any further.
There are, however, other forms of taxable income that you should be aware of after suffering a workplace accident.
Light Duty Wages
Workers comp benefit payments were designed to cover your lost wages. But if you return to work, any wages you do receive are taxable (even if you’re on light duty). And you do have to claim them on your taxes. You don’t want an unfriendly correspondence from the Internal Revenue Service in the future.
Let’s say your Average Weekly Wage (AWW) prior to your workplace injury was $100 and your wages while on light duty were only $50. Since $50 is less than 80% of your AWW, you would be entitled to some workers’ compensation benefits ($24 a week, in this particular case) and you would still need to pay taxes on the $50/week you’re receiving from the work you are performing while on light duty work restrictions from your doctor.
Retirement plan benefits are taxable, no matter your reason for retiring.
So whether you retire to take care of the grandkids, tour the country in your new RV, or because you’ve been injured and you think now is a good time, your retirement benefits are taxable income.
Social Security Disability Income (SSDI)
Collecting federal SSDI payments in addition to workers’ compensation? This is where things get a little more complicated.
You can collect both Social Security and workers’ comp benefits at the same time. However, you will not collect both disability benefits and workers comp benefits in full. Depending on what state you live in, either your workers’ comp or social security benefits will be reduced so that you are not collecting more than 80% of your Average Weekly Wage between the two programs.
If it is your SSDI benefits that are reduced, you may be taxed on the amount of that offset. Although, in most cases, this amount will be negligible. Thirty-five states currently allow the Social Security Administration to cut SSDI payments rather than workers’ comp payments.
In the remaining 15 states—Alaska, California, Colorado, Florida, Louisiana, Minnesota, Montana, Nevada, New Jersey, New York, North Dakota, Ohio, Oregon, Washington, and Wisconsin—workers’ comp benefits will be reduced instead, known as “reverse offset.” Again, your workers comp payments will not be taxed, but a certain portion of your SSDI payments might be taxable if your income is high enough.
Workers compensation Settlements
The majority of workers’ compensation cases end with a settlement rather than a trial. And anytime this happens, the employee usually signs a General Release and Resignation Agreement that both terminates their employment and releases their employer from any liability for anything that may have happened during the injured workers’ employment. You have to be willing to accept these terms when it comes to your workers compensation settlements.
Just like workers’ compensation benefits, you will not pay taxes on your settlement, but if separate consideration is paid by your employer for the injured workers’ signature on the General Release and Resignation, those funds may be taxable and you should consult with your accountant or tax preparer regarding that payment.
Is Workers Comp Tax Deductible?
We’ve gone over how taxes affect injured employees, but what about employers? Is workers comp tax deductible?
LLCs, partnerships, and sole proprietorships are allowed to deduct workers’ comp insurance premiums from their taxes. Use Schedule C (line 15) to report these expenses. Partnerships will use the 1065 Form (line 10).
As with any tax-related questions, however, we recommend that you work with an accountant who can advise you on the best course of action to take.
If your financial situation has taken a hit due to a recent workplace injury, it may calm you to know that your workers compensation benefits are not taxable at the state or federal levels and you will be able to keep the entirety of your workers comp checks.
However, you should be aware that other forms of income that you might receive during this time are still subject to taxes.
For tax-related questions, it’s always best to consult with an experienced accountant who can help you get the most out of your finances (and stay on the right side of the law). And for questions about the workers’ compensation process, it’s best to work with an experienced workers compensation attorney who can fight for the best possible outcome to your case.
At The Law Office of Brian D. Tadros, P.A., our primary goal is always your satisfaction. We are always available to provide you with guidance and advice and we will never push you into accepting an offer you are not comfortable with.