Will I Be Taxed on My 2017 Workers’ Comp Benefits?
The holidays are almost over, 2018 is almost here – and thoughts turn to filing taxes for the past year. As the Long Beach lawyers who are experts in Workers Compensation, our client’s often ask us if their Workers Comp Benefits will be taxed.
Whether you are taxed on your Social Security Disability Income will depend upon your total income from all sources. In this article we discuss the general rules for taxing Social Security Disability Income. However, you should always discuss your tax situation with your Social Security Disability lawyer or your accountant, to understand how these rules apply to your situation.
Workers’ compensation benefits are not normally considered taxable income by either individual States (State Taxes) or the IRS (Federal Taxes). Most injured workers do NOT have to pay taxes on their Workers Comp benefit. Only under very limited circumstances will any portion of workers’ compensation benefits be taxable.
Taxes on Workers Comp – The Exception
There is however one limited exception, that only arises when an individual who receives workers comp benefits ALSO receives disability benefits through Social Security disability insurance (SSDI) or Supplemental Security Income (SSI). This exception is called the “Workers’ Compensation Offset”. In this article our experienced Workers Comp lawyers explain some of these tax issues.
How the Workers’ Compensation Offset Works
In certain cases, the Social Security Administration (SSA) may reduce a person’s SSDI or SSI benefit amount, so that the combined amount of the workers’ comp benefits and the disability payments remains below a certain dollar threshold.
In this case, the amount of workers’ comp that will be taxable will be the same amount by which Social Security reduces your disability payments. For example: if SSA lowers your monthly SSDI check by $200 due to the “workers’ compensation offset”, then $200 of your workers’ comp will be taxable.
And – even if you are subject to the Workers Compensation Offset – most people who receive Social Security and Workers’ Comp benefits still don’t have enough taxable income to owe federal taxes. So even if a portion of your benefits are taxable, it is unlikely that you will owe federal income tax.
Plus, Social Security will subtract any legal fees, as well as past and future medical costs, payments to dependents, and other expenses from the workers’ comp amount prior to calculating the offset.
When Does the Workers’ Compensation Offset Apply?
If an individual is receiving BOTH Workers’ Compensation AND Social Security disability benefits, the combined amount of their benefits cannot exceed 80% of their average current earnings.
“Average Current Earnings” are defined as the largest of:
• the average monthly wage used to calculate your benefits
• one-sixtieth of your total wages for your highest-earning five years in a row, or
• one-twelfth of your total wages from your highest-earning year out of the preceding five.
If you will be receiving a Workers Comp “lump sum” Social Security will prorate the settlement amount, after deducting expenses, to come up with your monthly rate. If this is confusing, our experienced Workers Compensation lawyers are happy to discuss this with you.
Reducing Taxable Income in Workers’ Compensation Settlements
As you can see, calculating this Workers’ Compensation Offset is complicated and a bit confusing. For this reason it is very important that your attorney structure your workers’ compensation settlement in a way that minimizes (or completely avoids) any Workers’ Comp Offset. This will ensure that you do not unnecessarily end up paying taxes because of the Workers Comp Offset.
An experienced workers’ compensation lawyer can often structure your workers’ comp settlement in a way that will minimizes (or eliminate) the offset and reduces (or eliminate) any taxable income.
One technique used by experienced workers’ compensation lawyers is to state that the lump sum should be “treated” as being spread out through your expected lifetime. The injured worker still collects the lump sum – but the lump sum is “considered” to cover the remainder of your lifespan according to actuarial tables.
Other Tax Issues Involving Workers’ Compensation
Remember that – although workers’ comp benefits generally are not taxable – any retirement benefits you have collected are NOT exempt from taxation . . . even if you retired due to an illness or injury that gave rise to a workers’ comp claim.
Income from Returning to WorkSanta Ana Lawyers
Many Individuals who receive workers’ comp return to work – sometimes performing “light work” AND continuing to receive a portion of their workers’ comp benefits. Remember, any wages earned while you are still receiving workers’ comp benefits are taxable.
Interest PaymentsSanta Ana Lawyers
Sometimes – when the insurance company caused a considerable delay or was involved in egregious conduct – workers’ compensation benefits are paid with interest. The interest paid is considered taxable income.