Do I Have to Pay Taxes on My Workers’ Compensation?
Along with your auto, life, and personal healthcare insurance, you could also benefit from workers’ compensation insurance. Workers’ compensation is a type of insurance mandated by the U.S. Department of Labor that employers pay to provide benefits for their staff if they get injured on the job. This is not a policy that workers pay for, and it is meant to provide benefits for lost wages, medical treatment, and vocational rehabilitation.
Depending on the circumstances, your workers’ compensation benefits could become your primary source of income. That will make you wonder if you must pay taxes on your workers’ compensation benefits. There is good news about that but with conditions.
Is Workers’ Comp Taxable?
Generally speaking, your workers’ compensation benefits are not taxable. They also aren’t reported on your yearly tax statements. That means you are exempt from paying state or federal taxes whether you’ve gotten a lump sum payment or paid weekly or biweekly. However, there are some caveats.
A Light-Duty Job
Depending on your workplace accident, you might be able to recover from your injuries and return to a different type of job. This would be considered light-duty. It is the type of job that is less physically demanding than your previous work. Here are some examples of what a light-duty job looks like:
- Transitioning from manual labor to a desk job
- Working remotely from home
- Working limited hours
- Modified physical tasks
- Limited exposure to chemicals, cleaners, bright lights, or noise
A light-duty job can be a permanent or temporary gig. If the salary from your new light-duty job is the same or more than what you were making before, your workers’ compensation payments will stop.
However, if there is a gap in salary, the workers’ compensation will continue at a reduced amount, but the salary from your light-duty job will be taxed. The workers’ compensation will still be tax-free.
Social Security Disability Offset
Things can get complicated if you receive Social Security Disability Insurance(SSDI) benefits. When that happens, your combined income cannot exceed more than 80% of the gross income from the job you earned before your disability. If your combined benefits exceed the 80% threshold, your SSDI benefits will be reduced. This is considered an offset, which can be considered taxable income.
It becomes taxable income because it is an amount that comes from Social Security rather than workers’ compensation.
Supplemental Security Income
In addition to SSDI, some people are eligible for Supplemental Security Income (SSI). This is another federal program designed to help people who are disabled or for families with limited incomes. SSI benefits are not taxable.
To qualify for SSI benefits, you must meet all of the following requirements:
- Be disabled, blind, or age 65
- Have limited income and resources
- Be a U.S. citizen or national or a lawfully permitted alien meeting additional requirements
- Reside in one of the 50 states or the District of Columbia
If you receive workers’ compensation benefits, it could impact your ability to receive SSI benefits. In this scenario, workers’ compensation benefits are considered income. That would mean the rate of SSI benefits would be deducted. In other words, the government does not want to pay you the same amount twice for the same injuries.
Starting Retirement
Your workers’ compensation benefits could continue until you retire and begin collecting Social Security retirement benefits. Your workers’ compensation benefits could continue to pay for your medical expenses. If that happens, your Social Security retirement benefits would become your income, which means that amount could be reduced. However, there are some states where you can continue receiving full workers’ compensation and Social Security retirement benefits.
When you set up workers’ compensation or any other benefits from the government, it is a good idea to speak with a legal advisor who specializes in these matters. They can help process the claim, work through a possible denial, and provide the information or guidance to help you make sense of your tax obligations.
