Workers’ comp benefits help disabled employees pay for their bills and medical care while they’re recovering from injury or sickness. But in most cases, it’s not enough to cover all of their expenses. That’s why the thought of having to pay taxes on workers comp bothers most beneficiaries.
When is Workers’ Comp Taxable?
In general, workers’ compensation benefits are NOT taxable both on the federal and state level. This includes lost wages benefits, payments for medical care, and even survivor benefits paid to dependents. But if on top of those you’re also receiving Social Security Disability Benefits (SSDI) or Supplemental Security Income (SSI), you might be required to pay taxes on a portion of your workers’ compensation.
When Can You Receive Both Workers Comp and Social Security Benefits?
There’s no law that says you can’t receive social security benefits if you’re already receiving workers comp. So if you’re eligible for both, then you should be able to receive them concurrently.
Workers comp, in essence, is a benefit you get when you’re hurt while at work. In most states, this will be paid by a private insurance company that your employer took out the policy from. But the rates and terms are heavily regulated by state laws and statutes.
Since workers comp is administered on a state level, the eligibility requirements can vary. But in general, you can only claim workers’ compensation if your injury is work-related. Some states also require that your injury must be the fault of your employer. Though if you live in states like Florida, you can claim workers comp regardless of who’s at fault.
Social security benefits, on the other hand, are funded by the federal government. So the rules on eligibility are the same all over the country. Basically, you can only claim social security disability benefits if:
- you have paid enough social security taxes
- your disability is expected to last for at least a year or result in death
If you haven’t paid enough social security taxes, you can still apply for supplemental security income. Provided, however, that you are earning below the SSA’s income threshold.
This is why, in most cases, you can only receive both workers comp and SSDI at the same time if you:
- are working in a job that’s covered by social security
- have a permanent disability
If you’re not sure whether you qualify for both, an experienced workers’ compensation lawyer like Victor Malca can help you.
Computing Your Taxable Income
As mentioned, if you need to pay taxes on your workers’ comp, it will only be for a portion of it. That “portion” will be taken from your benefits’ offset amount.
In general, your combined workers’ compensation and SSDI benefits should not exceed 80% of your income before you got disabled. If it does, the SSA will reduce your disability benefits. This is called the “offsetting” process.
For example, you were earning $3,000 before your injury and your workers’ comp is $2,000. On top of that, you are eligible for an SSDI benefit of $1,000. Combined, they total $3,000 which is way more than $2,400 (80% of your previous earnings). In such instances, the SSA will deduct your SSDI benefit by $600.
Some states, however, employ the “reverse offsetting” approach. Instead of your social security benefits, they will reduce your workers’ comp. So your total benefits still fall within the 80% threshold.
Regardless of which benefit got offset, the offset amount will form part of your taxable income. Since SSI and SSDI benefits are already taxable, that amount will be taken against your workers’ comp benefits.
Taking from the example above, your taxable income each month is $1,000 ($600 from worker’s comp and 400 from your SSDI). If you have any other income aside from the aforementioned benefits, those will be reflected in your tax returns too.
How Much Tax Will You Pay (If Any)?
Even if part of your workers’ comp benefit is taxable, there’s a good chance you won’t be paying any tax on it. Or if you do, the amount is rather negligible.
Remember that you only have to pay taxes if your taxable income has exceeded the IRS’ limit. Most of the time, disability benefits alone won’t be enough to put you over that threshold. This is especially true for those receiving SSI as they won’t qualify for it in the first place if they are earning above the minimum wage.
Do You Have to Report Workers Comp on Your Taxes?
Since workers comp is essentially a nontaxable income, you’re not required to report it in your tax returns.
But if you’re receiving both workers comp and social security benefits, the offset amount (if any) should be reported. If you returned to work within the fiscal year, any wages you receive even while on light-duty restrictions will also be taxable.
Other disability benefits that are also considered nontaxable are:
- settlements awarded by the court as compensation for disability or physical injuries
- personal injury benefits
- compensation for lost wages from a no-fault insurance policy
- compensation for permanent loss of a body part/s
Is Workers Comp Tax Deductible?
No. You can only claim a tax deduction for expenses. Workers’ comp benefits are, obviously, not an expense on your part. As such, the Internal Revenue Service doesn’t allow employees to deduct workers’ compensation benefits from their taxes. But businesses may claim workers comp premium as a deduction in their taxes.
VICTOR MALCA LAW – A TRUSTED NAME IN FLORIDA
Victor Malca P.A. has over 27 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.