Workers’ compensation is a type of insurance that provides benefits to employees who are injured or become ill due to their job. It can be an excellent resource for employees who need financial assistance while unable to work. However, there is often confusion about whether workers’ compensation payments are taxable or not.
Are Workers’ Compensation Benefits Taxable?
No, workers’ comp benefits are not taxable. This IRS Publication states the “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.”
This means you do not have to pay taxes on your benefits. This tax exemption also applies to the family of an injured worker that died due to their injuries.
When Are Workers’ Comp Benefits Taxable?
There are a few exceptions to the general rule of tax-exempt workers’ compensation benefits.
Taxes on Light-Duty Work
If an injured worker returns to work for light or modified duty and receives wages for that work, those wages are taxable. However, if an employee is also receiving Temporary Partial Disability (TPD) benefits, those payments are not taxable.
TPD benefits are payments made when you return to work, but you aren’t making as much as you were before your injury. For instance, if you worked overtime before getting hurt and only work light duty regular hours after your injury, workers’ comp would make up ⅔ of the difference.
Taxes for Social Security Disability and Workers Compensation
If you receive disability benefits such as Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), or retirement benefits, this is considered supplemental income and can be taxed. In this case, payments from SSDI or SSI are reduced, and the difference created by the amount of workers’ compensation would be taxable.
Workers Compensation Offset
When an injured worker receives disability benefits such as SSDI or SSI, the Social Security Administration (SSA) reduces these payments so that the combined benefits remain below a certain threshold.
Under workers’ compensation offset, the total amount an employee receives from the SSA and workers’ compensation cannot exceed 80 percent of the workers’ “average current earnings” before they became disabled.
The Federal Threshold for Taxable Income
Most injured workers who receive social security benefits and workers’ comp benefits don’t have enough taxable income to owe federal taxes. This means that even if your SSDI or SSI is taxable, it is unlikely you will owe taxes.
Contact Collier Law for information on how SSDI benefits and workers’ compensation work together towards your taxable income.
How Collier Law Can Help You With the Workers’ Compensation Process
You are so much more than a number to us: we value our attorney-client relationship and getting the justice you deserve. We are advocates for injured employees. Call for a free consultation to find out how we may assist you.