Is Workers Compensation Taxable?

Workers’ compensation benefits are not taxable income. For federal income tax purposes, benefits that are awarded under a workers’ compensation act or statute due to work-related sickness or injury are fully exempt from tax.

Do I Need to Report Workers’ Compensation on My Tax Return?

As a general rule, no, you do not need to report your workers’ compensation benefits on your tax return. Since you are not required to pay income tax on these benefits, there is no need to report them. However, tax experts do advise that retirement plan benefits can be taxed if either:

• You retire because of an occupational injury or sickness.
• Your workers’ comp payments lower your Social Security or railroad retirement benefits.

Additionally, you may have to report your workers’ compensation as income if:

• You received the payments as compensation for an injury.
• You made prior deductions of related medical expenses.

Are There Exceptions Where a Workers’ Compensation Settlement Could Be Taxed?

Although most workers’ compensation is exempt from taxes, there are exceptions to this rule if an individual receives other forms of income while also receiving workers’ comp payments. According to IRS rules, other types of income that you receive simultaneously with workers’ comp have to be reported and you must pay taxes that were not already withheld. These include:

Retirement Benefits

An injured worker may accept a workers’ comp settlement but also retire due to the workplace injury or illness they suffered. Those retirement benefits that are based on age, the amount of work the employee did, or employee contributions are taxable. Even though your injury or illness led to your retirement, these benefits are not considered part of your workers’ comp settlement.

Return to Light-Duty Work

The worker may receive workers’ comp but later regain the ability to perform light-duty work tasks and earn at least a little extra income. If the worker takes such a position, they will need to pay taxes on the money they earn. The worker will still not be taxed on their workers’ comp payments.

Social Security Disability Insurance (SSDI)

Injured workers with qualifying disabilities may receive SSDI, but combined with workers’ compensation their total benefits cannot exceed 80% of their average monthly income. If the combined payments exceed this threshold, the injured worker is subject to an offset.

An offset will be deducted from the worker’s SSDI benefits to lower the combined total (SSDI plus workers’ comp) back to the 80% mark. This offset amount will also be taxable. However, other complex tax rules may affect whether the offset is even an issue.

Talk to Pond Lehocky to learn more.

What About Interest Paid?

Some injured workers accept a structured settlement that pays them money over time. Although the original settlement amount is not taxable, any interest that is earned on the money will be. Along with this are interest gains on the original settlement amount.

The government views interest and other gains on the original settlement amount to be distinct forms of income. So while the workers’ compensation benefits themselves remain tax-free as per the standard rule, the interest is separate and apart from that money and needs to be reported on the worker’s income tax return.

Is a Lump-Sum Workers’ Comp Settlement Taxable?

Lump-sum workers’ compensation settlement payments are popular options for those who want a significant amount of money upfront without having to wait for periodic payments or continue dealing with the hassle of a workers’ comp claim. In most cases, a worker will not have to pay federal taxes on this settlement amount.

There are, however, potential limitations to this rule. For instance, if the injured worker earns additional income or benefits (like the ones mentioned above), then taxes on those wages will accrue. Also, some states may tax you on the settlement amount. Our legal team represents workers’ comp cases in all 50 states, so let us advise you of any state tax nuances that may apply to your benefits.

How Is a Workers’ Compensation Settlement Calculated?

Since workers’ comp settlements are so popular, it helps to understand how the amount of money is calculated. Various factors are taken into account when the insurance company determines how much of a workers’ compensation settlement to offer. Among these factors are:

• The amount of the injured worker’s lost wages
• How much the employee had earned before suffering the injury
• The worker’s medical condition after the injury
• Present and future medical costs the worker will reasonably be expected to incur
• The worker’s impairment rating (a percentage that represents the loss of the employee’s overall bodily function affecting their ability to work)
• The worker’s educational history
• How much it would cost to retrain the employee for a different position if they are unable to return to their previous one because of their injury
• The applicable state workers’ compensation laws

It is important to note that you can negotiate your final settlement amount with the workers’ comp insurance company, but it is strongly recommended that you have legal counsel representing you during these discussions. Talk to our experienced team to assist with your settlement so you receive the amount you deserve.

How Long Does It Take to Receive a Workers’ Comp Settlement?

If you’ve been injured on the job, you most likely want to receive a fair amount of workers’ compensation money that will help you pay your bills, replace income, provide for your family, and move on with your life. Naturally, you want to know how long this process will take. Although every workers’ comp case is different and timelines may vary, an injured worker should expect their claim to last anywhere from 12 to 18 months.

Settling may only take 12 to 14 months if the worker’s injury does not lead to a permanent disability if they have no attorney representing them, and if they do not negotiate with the insurance company. However, this may result in you receiving less than the money you deserve. Conversely, some factors that may extend the timeline include the insurance company’s resistance to settling with you and any appeals that are taken.

We recommend retaining a knowledgeable attorney to help you better understand the timeline and to expedite the process as much as possible.

Talk to a Lawyer if You Are Experiencing Tax Issues Related to Workers’ Compensation

Every injured worker simply wants a fair shake from the workers’ compensation system and to better understand their rights. But to protect their best interests, they also need to understand the potential tax implications that come with their decision to accept a settlement, retire, take on additional work, and other scenarios.

If you were hurt in a workplace accident and want to know more about what to expect from workers’ compensation, then it is time to speak with dedicated legal counsel. That is where the attorneys of Pond Lehocky Giordano come in. Contact us to get started or to ask questions about workers’ comp benefits.

You can also call us at 1-800-568-5700.