Ask the Attorney: Is “Workmans Comp” Taxable?
Long Beach Attorneys Explain:
Paying Taxes on Workers Comp (“Workmans Comp”)–
Tax time is here again, and our clients are often left wondering whether they will be taxed on their Workers Compensation payments.
Workers’ Compensation benefits are typically not taxable income for either your state or federal taxes. Similarly, Workers’ Comp benefits paid to surviving family members after a worker’s death are not considered taxable income.
However there is a single important exception if you also receive Social Security Disability insurance (SSDI) or Supplemental Security Income (SSI), in addition to your workers Comp benefits.
In certain cases, the Social Security Administration (SSA) may reduce your SSDI or SSI – in order to keep the combined amount of your Workers’ Comp benefits and Social Security payments below a certain “threshold” amount.
How Much Tax Will I Pay on Workers Comp?
The amount of your Workers’ Compensation benefits that are taxable will be the same amount by which Social Security reduces your Disability Payments. This is called the “Workers’ Compensation Offset”.
For example, if Social Security Administration lowers your monthly SSDI check by $200 due to the workers’ compensation offset, then $200/month ($2,400/year) of your workers’ compensation is taxable.
However, most of the people who receive both Social Security and Workers’ Compensation benefits still do not have enough taxable income to owe the IRS taxes. So, even if a portion of your benefits are “taxable”, it still is unlikely that you will owe any taxes.
In the vast majority of cases, our experienced workers’ compensation attorneys can structure your workers’ comp settlement in a way that minimizes the “Workers’ Compensation Offset” – and reduces your taxable income. The most common technique used is to specify in the Workers Comp settlement agreement that a lump sum which was received should be treated as being spread out through your expected lifetime.
When Does the Workers’ Compensation Offset Apply?
If a person receives both Workers’ Compensation benefits 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 wages used to calculate benefits; or
- 1/60th of total wages for the highest-earning five years in a row; or
- 1/12 of the total wages from the highest-earning year out of the preceding five.
Other Tax Issues Involving Workers’ Comp
Even though Workers’ Compensation benefits generally are not taxable, any retirement benefits you’ve collected based on your age, years of service, or prior contributions, are likely taxable.
Returning to Work
If you return to work and perform “light work” while continuing to receive a portion of their workers’ comp benefits, the wages earned while you’re still receiving workers’ comp benefits are considered taxable income.
If your Workers’ Comp benefits were paid with interest – because of the insurance company’s delay or egregious conduct – the interest paid is considered taxable income.
Our Long Beach Workers Comp (“Workmans Comp”) Attorneys Can Help
Call Our Long Beach Workers Comp Attorneys: 562-622-4800
Long Beach Workers Comp (“WOrkmans Comp”) attorneys serving Los Angeles, Orange County & Southern California, including: Anaheim, Carson, Bellflower, Compton, Downey, Fullerton, Garden Grove, Huntington Beach, La Habra, La Mirada, Lakewood, Lomita, San Pedro, Santa Ana, Torrance, Wilmington, Whittier and Yorba Linda.