As a citizen of this country, you are obliged to give a portion of your income to the government in the form of taxes. But what if you’re living off your workers’ comp benefits? Do you still have to pay taxes? Is a workers’ comp settlement taxable?
In general, the law does not consider workers’ compensation as taxable income. Thus, workers’ comp settlements are not taxable both at the state and federal level. It doesn’t matter whether you’re receiving monthly payments or a lump sum settlement. As long as it’s part of your workers’ comp benefits, you won’t get taxed.
But that doesn’t mean you’ll be free from taxes if you’re on workers comp. Your workers’ comp settlement may still affect your tax return in other ways.
How Workers Comp Benefits Affect Your Taxes
The Internal Revenue Code expressly states that: “amounts received under workmen’s compensation acts as compensation for personal injuries or sickness shall not form part of the taxable gross income.” But if you’re receiving SSI or SSDI on top of your workers’ comp, it’s a different story.
If you’re not familiar, SSI stands for Supplemental Security Income while SSDI means Social Security Disability Income. Both of these benefits are administered by the Social Security Agency (SSA). While workers comp isn’t considered taxable income, SSA benefits are.
And if you’re wondering, yes, it’s very much possible to receive workers comp and SSDI or SSI at the same time. The combined amount, however, should not exceed 80% of your weekly wage from before the accident. Otherwise, the SSA will reduce your benefits in a process called workers compensation offsetting.
For example, if your income from before your injury is $1,000 per week, your total benefits should not exceed $800. So if you’re receiving $500 in workers comp and $500 in SSDI, the SSA will reduce your benefits by $200.
Some states also implement a “reverse offsetting” process. Instead of your SSI/SSDI, your workers’ comp will be reduced.
Regardless of which benefit takes the toll, the offset amount will form part of your taxable income. In the example above, the $200 reduction will become taxable and should be reported in your tax return.
Aside from SSI/SSDI, having other sources of income while receiving workers comp will also affect your taxes. For example, if you take money from a 401k or retirement plan during your benefit period, you’ll most likely pay taxes for that. If you return to work or did any income-generating activity while on workers comp, you’ll also be taxed accordingly.
Can IRS Take Workers Comp Settlement?
If you have unpaid taxes, the IRS can legally levy or garnish a portion of your earnings or seize any property you own. But they cannot take your workers’ comp settlement if they are paid under a workers’ compensation act or a similar statute.
In Florida, the statutes also protect workers’ compensation benefits from such claims. Section 440.22 specifically states that:
such compensation and benefits shall be exempt from all claims of creditors, and from levy, execution, and attachments or another remedy for recovery or collection of a debt, which exemption may not be waived.
Should You Declare Workers Comp Benefits On Your Tax Return?
No, you are not required to declare workers comp benefits on your tax return. Unless they become taxable due to the circumstances mentioned above.
Do You Receive a 1099 for Workers Compensation?
A 1099 form is a record of any income you received other than wages and salaries. Since workers’ compensation isn’t a taxable income, you should not receive a 1099 form for it. If you did, inform your workers’ compensation office about the mistake and find out what you can do. You can also talk to your employer so they can file a corrected 1099.
But if a part of your workers’ comp is taxable because you’re also receiving SSI/SSDI, you should declare the taxable part under ”Other Reportable Income”. This post provides a step-by-step guide on how to do it.
These all may sound easy but figuring out whether or not you owe taxes on your workers’ comp can be complicated. As such, it’s best to consult a tax professional or your workers’ comp attorney to determine the best course of action.
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Victor Malca P.A. has over 25 years of litigation experience in Workers Compensation and Social Security Disability lawsuits. His experience and continued success in fighting for his clients puts among the most trusted workers’ compensation lawyers in Florida. Our area of expertise is in representing injured workers on compensation benefit cases and disabled individuals claim social security disability benefits.
Our unwavering advocacy for employee rights and privileges are recognized by our past clients across South Florida. Book a free consultation today.
About The Author
Judy Ponio is a writer for Victor Malca Law P.A. and enjoys helping people with questions about social security, workers compensation, and other serious matters involving people’s livelihood. She is not an attorney and her writing should not be considered legal advice.