Are you wondering whether you’ll have to pay taxes on your workers’ compensation benefits? You’re not alone. It’s common to feel uncertain about what to report and how different payments fit into your taxes. The answer can vary depending on your situation, so it’s best to get professional advice long before tax season arrives.
A workers’ compensation lawyer can help you understand what counts as taxable and what doesn’t. They can look at your full benefit package, help you avoid mistakes, and explain your options in clear terms. They can also help you plan ahead and protect your income if any of your benefits are taxable.
Workers’ Compensation and Taxation
Workers’ compensation pays benefits to eligible workers when they get hurt or sick on the job. These benefits can help workers cover their medical bills and replace a portion of their lost wages. Most of the time, the Internal Revenue Service (IRS) does not tax workers’ compensation payments. The money usually counts as tax-free because it’s meant to replace wages and cover costs related to a work-related injury or illness, so it’s not considered income.
However, the question of workers’ comp taxability can get tricky if you also receive Social Security payments. In that case, a part of your workers’ comp payments might get taxed.
Taxability of Workers’ Compensation Benefits
The taxability of workers’ compensation benefits depends on the nature of the payments and whether workers receive them along with other benefits like Social Security.
Are Workers’ Compensation Benefits Taxable at the Federal Level?
In most cases, workers do not pay federal income tax on workers’ compensation benefits. The Internal Revenue Code excludes these payments from taxable income if a worker receives them under a workers’ compensation law for an occupational injury or illness. That means if you get benefits for a job-related injury, you likely do not need to report that money as income on your federal tax return.
However, some exceptions exist. If you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), some of your workers’ compensation payments could be taxable. If the government reduces your SSDI payments based on the amount you receive from workers’ compensation, the IRS may tax the part of your workers’ comp that offsets your SSDI.
State-Level Tax Implications for Workers’ Compensation
Most states follow federal rules and do not tax workers’ compensation benefits. However, each state controls its own tax laws. Some states might handle tax reporting or withholding differently. You should check with your state’s tax agency or a local attorney to understand how your state treats these benefits.
Also, if your benefits include payment for lost wages after a settlement, some states could treat part of that money as taxable, especially if it replaces wages that would normally be taxed.
When Workers’ Compensation May Become Taxable
Although workers’ compensation benefits are usually tax-free, you might need to pay taxes while receiving workers’ comp in some scenarios. For example, if you return to work in a light-duty role and earn wages while still getting partial workers’ comp, the IRS will tax your new wages. The workers’ comp portion remains non-taxable, but you must report any new earnings as income.
If you retire because of a work injury and receive retirement benefits in addition to workers’ comp, your retirement payments will be taxable, even if you also get workers’ compensation. Retirement benefits do not fall under workers’ compensation laws, so the IRS treats them like regular income.
In short, most workers do not pay taxes on their workers’ compensation. But if your benefits overlap with other income, you may owe taxes on part of it.
Social Security and Workers’ Compensation Interactions
Sometimes, injured workers receive both workers’ compensation and Social Security benefits. If this happens, the government might reduce Social Security payments based on how much the person receives in workers’ comp. This is called the “workers’ compensation offset.”
If that offset applies, the IRS might tax the portion of the workers’ comp benefit that replaces part of the SSDI benefit. So, even though workers’ compensation is usually not taxable, an offset could change that. If you qualify for both types of benefits, you should track all payments and ask a workers’ compensation lawyer what you’ll need to report on your tax return.
Workers’ Compensation and IRS Guidelines
In most cases, IRS guidelines say you will not need to include workers’ compensation payments in your taxable income during tax season. The benefits will stay tax-free if you receive them under a workers’ compensation law for a job injury or illness. However, if any part of the money replaces your wages after you return to work or receive retirement benefits, the IRS might count that part as taxable. The IRS also has tax exceptions when you receive workers’ comp benefits along with Social Security.
You can avoid surprises at tax time by speaking with a knowledgeable attorney before filing your return. A workers’ compensation lawyer can also help you structure your workers’ comp settlement in a way that reduces unnecessary taxes and allows you to keep more of your benefits.
Practical Considerations for Workers’ Compensation Recipients
A workers’ compensation lawyer can explain how taxes might affect your workers’ comp benefits and help you plan around any tax issues. If your payments overlap with other benefits or include a lump sum, your attorney can review the details of your settlement and explain what to expect.
Some workers’ comp settlements include money for lost wages, medical care, or retirement. A lawyer can help you break down your payout and structure it in a way that reduces your tax burden as much as possible. They can also work with your tax advisor to make sure you report everything correctly.
If you feel confused about how much of your benefits might get taxed, a lawyer can talk you through it and make sure you understand your rights.
Call Dr Ted Injury Law
Still have questions about your workers’ compensation benefits or how taxes might affect your payments? Contact Dr Ted Injury Law today for a free consultation. Our team can review your case, explain your options, and help you make informed decisions.
