The Short Answer:
In most cases, workers’ compensation benefits you receive for a work‑related injury or illness are not taxable on your federal income tax return. However, there are limited situations where taxation can come into play, like when your workers’ compensation interacts with Social Security disability benefits and results in an offset that creates taxable income. Because determining your exact tax situation can be complex, an attorney from The McMahan Law Firm can help you understand how your workers’ compensation benefits may affect your overall tax liability.
Key Takeaways
- Under federal tax law, workers’ compensation payments for a workplace injury or illness are typically excluded from taxable income.
- If you are receiving both workers’ compensation and Social Security Disability Insurance (SSDI) and the combined payments exceed a certain threshold of your pre‑injury income, an offset may occur that creates taxable income.
- A lump‑sum workers’ compensation settlement is still generally tax‑free, but any portion that reflects compensation previously offset or tied to other taxable benefits may have different tax implications.
- Even though your workers’ compensation benefits are typically non‑taxable, any other income you receive (such as wages, disability insurance, or retirement income) may still be taxable.
Workers’ Comp Benefits and Taxes
The truth of the matter is, the vast majority of workers’ compensation benefits aren’t taxable. They’re designed to help you cover your medical expenses and pay your bills, not to make money, and as such even though they’re replacing a portion of your income, they’re not generally treated as such for tax purposes. In addition, the IRS understands that the compensation you get is only for a portion of your normal pay, so they don’t levy taxes on it.
There is only one circumstance where your benefits might be taxable, and that’s if they’re offset by any Social Security disability benefits you receive.
Social Security Disability and Taxes
If the combination of your Social Security disability and your workers’ comp equates to 80 percent or more of your normal average income, your workers’ compensation will be reduced by the amount over 80 percent that your total award equals. In this case, the amount of your workers’ compensation benefits are taxable.
Thus, if your total benefits are $150 — over 80 percent of your normal earnings — your Social Security benefits will be reduced by $150, and $150 of your workers’ compensation benefits will be taxable income. However, you still may not need to pay taxes, based on your income threshold.
Income Threshold
If you make under a certain amount of money total, your Social Security benefits may not be taxable. The threshold for this is $25,000 per year for a single individual and $32,000 for married couples. If you make less than this with all of your earnings, including half of your Social Security benefits, you won’t pay taxes.
The vast majority of people, as such, don’t end up having to pay taxes on their workers’ compensation benefits.
Hiring a Workers’ Comp Attorney
A qualified tax professional is always your best bet for determining where your tax liability lies. However, your workers’ compensation attorney should have plenty of experience to provide you with some basic guidance as to whether or not you’ll need to pay taxes on your benefits. In addition, if you encounter any issues with applications, denials or appeals, an attorney is your best bet to get them squared away.
If you’re in the Chattanooga area and are in need of help from a qualified work accident lawyer, The McMahan Law Firm is here to help. Contact us for a free consultation about your case, and let us get you on the right track today.
