Workers’ compensation benefits in Pennsylvania are not considered taxable income. For federal income tax purposes, workers’ compensation awarded under a workers’ compensation act or statute due to work-related sickness or injury are fully exempt from tax. As soon as an injury occurs, you should contact a workers’ compensation attorney, who can help you throughout every step of the process.
Is there an exception to the tax-exempt status?
If the injured worker receives Social Security Disability Insurance (SSDI) in addition to workers’ compensation, he or she may end up paying taxes. If your workers’ compensation and SSDI benefits exceed 80 percent of your average current earnings before you became disabled, then the excess amount would be deducted or “offset” from your benefits.
The taxable amount of your workers’ compensation benefits would be equivalent to the amount that Social Security reduces your SSDI payments. For example, if your SSDI benefits were reduced by $300, then $300 of your workers’ compensation benefits are now taxable.
Most people who receive both workers’ compensation and SSDI benefits do not get enough to owe federal taxes.
What are average current earnings?
Your average current earnings are determined using a formula from the Social Security Administration. The sum is typically calculated as:
- the average monthly wage used to calculate your benefits, OR
- one-sixtieth of your total wages for your highest-earning five consecutive years, OR
- one-twelfth of your total wages from your highest-earning year out of the preceding five years
The formula the Social Security Administration will use to determine your average current earnings depends on your individual circumstances.
Examples of a workers’ compensation offset
Susan’s average current earnings amount to $3,000. She qualifies for $2,000 in SSDI benefits and receives $800 per month in workers’ compensation. Her total benefits equal $2,800 per month.
She would experience an offset because her total monthly benefits exceed 80 percent of her average current earnings (80 percent of $3,000 = $2,400). In most states, Susan’s SSDI benefits would be reduced by $400 so that she does not exceed 80 percent of her average current earnings ($2,800-$2,400= $400).
Susan would be taxed on $400 of her $800 per month workers’ compensation benefits because her SSDI benefits were reduced by $400. Her final totals would be $800 in workers’ compensation ($400 of which would be taxable) and $1,600 in SSDI benefits.
Returning to work and taxation
Some injured workers have the ability to return to work on a light duty job. For example, if a police officer broke his leg and suffered severe bruising while on patrol, he may be able to return to work at a desk job. The police officer can still collect workers’ compensation benefits and wages while performing light duty. Any wages received from the job would be taxable. The workers’ compensation benefits would not be taxed.
Can a workers’ compensation attorney help me reduce my taxable income?
An experienced workers’ compensation attorney can structure your workers’ compensation settlement in a way that minimizes any offsets to your benefits and reduces your taxable income. Most people do not have to pay taxes on their workers’ compensation payments, but other forms of income may impact your taxable income.
It can be beneficial to contact an attorney to see how SSDI or other benefits could affect your workers’ compensation payments.
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