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Are Workers’ Comp Benefits Taxable?

Published on July 25th, 2017

If you’ve been injured on the job and have started to receive worker’s compensation, no doubt you’re grateful for the help. However, you might be wondering if that help you’re getting now is going to come back and get you later on in the form of taxes. If you’ve been worried about that, then read on to learn more about this important question.

Workers Compensation Benefits

The short answer to whether or not workers compensation benefits are taxable is, quite simply, no. The money you receive from your compensation claim is not taxable on either the state or federal level — whether you receive monthly payments or obtained a lump sum settlement. So, in most cases, you don’t have to worry!

You might have noticed that one phrase, “in most cases.” That’s because there is one exception to this rule, and that exception applies to those who receive both worker’s compensation and social security disability (SSDI) at the same time. When that happens, the math can actually get a little complicated. That’s because you will only be taxed for a certain portion, and how much depends on both how much you are getting in benefits, as well as how much you used to earn before your injury.

To clarify a little: when you are receiving both types of benefits, the SSA requires that your total payments stay below a certain limit. That limit is usually defined as 80% of your “average current earnings” — the amount you were earning before the injury that was used to calculate your benefits. Any amount you receive in benefits over this threshold has to be reduced. This reduction can come from your SSDI payments being reduced as well as your worker’s comp. The amount of worker’s comp taken away is known as the “worker’s compensation offset.” THAT offset amount is taxable.

For example: Worker A’s current earnings are $2,000. When injured, Worker A receives $1,000 a month in SSDI benefits, and another $800 in worker’s comp. The 80% threshold allowed by the SSA is $1,600 (80% of the original $2,000 the worker used to earn before the injury). Since Worker A is actually slated to get $1,800 total in benefits, his/her worker’s comp could be reduced by $200 to match the $1,600. That $200 offset is the “worker’s compensation offset” and is taxable. In addition, while the rest of the worker’s comp isn’t taxable, the SSDi payments are, so Worker A’s total tax burden per month of benefits is $1,200.

If this sounds more complicated than it needs to be, the good news is that there are experienced legal experts who can help you make sense of this. If you have questions about this or anything else, please don’t hesitate to contact us today!

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