Is Workers’ Comp Taxable?
Is workers’ comp taxable? Generally no, but a portion might be taxed if you also receive Social Security Disability Insurance (SSDI) benefits. Individuals who experience a work-related accident or sickness are entitled to workers’ compensation benefits. If you are qualified for temporary or permanent disability benefits via workers’ compensation, those benefits are normally tax-free. This tax-free status is usually at both the state and federal levels. However, it can get a bit complicated if you also receive Social Security Disability Insurance (SSDI) benefits. Particularly, when part of those benefits has been offset by your workers’ comp payments. In that instance, a portion of your workers’ comp benefits may be taxed.
Moreover, retirement plan benefits are potentially taxable. For example, if you retire because of a work-related illness or injury. Or, your worker’s compensation payments diminish your Social Security or railroad retirement benefits. Also, you might need to include workers’ compensation as income if you received the payments for an injury and you previously deducted related medical expenses.
Workers’ Comp Benefits and Taxes
Most likely, your state has a workers’ compensation insurance law that mandates employers to have coverage. Workers’ compensation insurance can help pay for the following:
- Accidents or injuries – Even if these are caused by the employees’ work.
- Illness – When the disorder results from work.
- Lost wages – When a work-related injury or illness prevents your employees from working.
- Ongoing treatment – This is required for an employee to recover fully. For example, physical therapy.
- Disability payments – For a doctor diagnosing a temporary or permanent work-related injury.
- Funeral and burial costs – When an employee loses their life in a workplace accident or from a work-related injury or illness.
When an employee receives workers’ compensation benefits, they are generally not subject to taxation. It makes no difference regarding the specific type of injury for which they are receiving benefits. For example, a slip and fall accident, a muscular or joint strain, a back ailment, tendonitis, or carpal tunnel syndrome. They will not, in most situations, pay taxes on workers’ compensation payouts.
When Is Workers’ Comp Taxable? – SSDI Offsets
In many states, offsets apply if you receive benefits from both Social Security Disability Insurance (SSDI) and workers’ compensation. Consider a worker who is seriously harmed on the job and must take months off to heal. Workers’ compensation makes up for some of their lost pay, but they may also receive Social Security Disability (SSDI). As a result, they may have to begin paying taxes on a portion of their benefits. These offsets may apply if your combined benefits exceed 80% of your average earnings before becoming disabled. In that instance, your SSDI benefits will be decreased, or “offset”. However, Social Security retirement benefits are not subject to the offset.
When the Offset Is Taxed
When there is an offset, taxes may be an issue. This is because a percentage of Social Security benefits is taxed when total income reaches a certain threshold. So, if your SSDI benefits are lowered due to the offset with workers’ compensation benefits, the amount of the offset may be taxable. Even if you received it as workers’ compensation benefits rather than SSDI benefits. This scenario only comes into play if your earnings for that year are high enough. If you had received the offset amount from Social Security rather than workers’ compensation, it would have been taxed anyway. This is the rationale behind taxing the offset amount.
When there is Worker’s Compensation Offset, Social Security benefits potentially subject to tax will include any workmen’s compensation whose receipt caused any reduction in Social Security disability benefits. For example, if an individual were entitled to $10,000 in Social Security disability benefits but received only $6,000 because of the receipt of $4,000 of workers’ compensation benefits, then, for the purpose of the provisions taxing Social Security benefits, the individual will be considered to have received $10,000 of Social Security benefits. (Source: ssa.gov)
Is Workers’ Comp Taxable – Example
Assume you were injured. As a result, you were entitled to $1,500 in SSDI benefits. Also, $1,200 in workers’ compensation benefits each month, totaling $2,700 per month. Now, consider that your pre-injury monthly wages were $3,000. Therefore, the combined benefits would be more than 90% of that amount ($1,200 + $1,500 = $2,700/$3,000 = 90%). In this case, your SSDI would be decreased by $300. This would bring your total benefits to 80% of $3,000, or $2,400). If your overall income is high enough, $300 of your monthly workers’ compensation benefits may be taxed.
Workers’ Comp Taxes: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI)
As outlined above, if an employee receives SSDI or SSI payments in addition to workers’ compensation benefits, they may be required to pay taxes. The distinction between SSDI and SSI has something to do with eligibility.
SSDI is a federal insurance program that’s tax-funded. Workers can get SSDI when they have enough work credits, based on how long they’ve paid Social Security taxes. Workers receive monthly Social Security benefits when they meet certain conditions:
- Disability – Have a disability
- Qualified – Paid Social Security payroll taxes for a certain amount of time (usually five to 10 years)
- Income – Have limited income
- SSDI benefits are taxable
SSI is a welfare program that provides cash and healthcare on a monthly basis to individuals who need it. People eligible for SSI may not have ever worked or don’t have enough work credits to apply for SSDI. To qualify, a person must be:
- Age – Over the age of 65
- Disability – Blind or disabled
- Citizenship – A U.S. citizen
- Income – On a limited income
- SSI payments are not taxable.
Frequently Asked Questions
Can someone collect Social Security Benefits and Workers’ Compensation Concurrently?
This can happen when a taxpayer’s health condition after being injured on the job does not improve. If the worker becomes disabled, he or she may get both disability insurance and workers’ compensation benefits. When this occurs, the Social Security Administration adjusts its payments. However, a portion of the workers’ compensation benefit may be subject to taxes.
Is Workers’ Comp Taxed if I return to work at a lesser capacity?
Some injured workers may be able to return to work on a limited basis. For example, consider a fireman who breaks his leg while fighting a fire. Nevertheless, he may be able to return to work at a desk or perform light duty around the fire station. While on limited duty, the fireman can still collect workers’ compensation benefits and salary. Any earnings from the job would be taxable. However, workers’ compensation benefits would be exempt from taxation.
Is Workers’ Comp Tax Deductible?
When it comes time to file taxes, employers may be able to deduct their workers’ compensation premiums, payments, and benefits. However, the Internal Revenue Service (IRS) does not allow employees to deduct workers’ compensation benefits on their tax filings.
Is Workers’ Comp Taxable – Final Words
Keep in mind that each state has its own workers’ compensation laws. If you currently collect Workers’ Comp benefits, you should learn about your state’s laws and regulations. If you have any questions or uncertainty, you should seek professional advice regarding your tax preparation.
Overpaid tax amounts to an interest-free loan to the IRS. Normally, an overpayment of taxes is refunded automatically when filing your taxes. There are some common things that often lead to overpaying taxes. Maybe, you are better off avoiding them. Sometimes, Americans make mistakes on their taxes and accidentally end up paying more than they should. In that case, taxpayers can reclaim overpaid income taxes by filing an amended tax return.
Every year, millions of taxpayers overpay their income taxes. Often to the tune of hundreds or even thousands of dollars. In total, this amounts to billions of dollars in overpaid taxes. In 2021, an estimated 16 million people overpaid taxes by an average of about $1,200 due to a change in how unemployment benefits are taxed. By November, the IRS had refunded more than $14 billion to people who overpaid taxes.