Do I Pay Taxes on Workers’ Compensation?

Filing a claim for insurance often brings up questions about taxes and personal responsibility for benefits. Luckily, workers’ compensation is an employee benefit not normally considered part of your taxable income. If you received benefits under a California workers’ compensation act or a federal policy for an illness or injury incurred on the job or as a result of your work, you generally do not have to pay taxes on that amount.

The Exception to the Rule

In some cases, you may be required to pay taxes on workers’ compensation benefits if you also received benefits associated with:

• • Social Security Disability Insurance (SSDI)
• • Supplemental Security Income (SSI)

If this is applicable to you, the amount you will be liable for paying is equal to the amount by which your additional benefits offset your workers’ compensation benefits. Even though there is a chance you may be liable for these taxes in these circumstances, individuals who qualify for both types of benefits often do not have a high enough taxable income to owe taxes at the state or federal level.

What if I Continue to Earn Income While Receiving Workers’ Compensation Benefits?

If you are being compensated normally for an overlapping period during which you are also receiving workers’ compensation benefits, you will only be responsible for paying taxes on the regular income paid by your employer.

How Can I Find Out if I Owe Taxes on My Benefits?

There are a couple of ways you can determine whether you owe taxes. You will owe taxes on the amount provided to you in a W-2. This amount will not reflect your workers’ compensation benefits. Any other benefits that may be considered income may be reflected in this amount. You can also consult a workers’ compensation attorney or a tax advisor if you have any questions regarding your tax liability after receiving workers’ compensation benefits.

I Owe the IRS. Can They Use My Workers’ Compensation Settlement to Cover My Liability?

The IRS has the power to use many different asset types to remedy tax debt. They cannot use any type of workers’ compensation benefits you receive, including your settlement. You will receive the amount of compensation you are due in full.

What Are My Options to Reduce Tax Liability After a Settlement Offset by Social Security?

If you are facing a situation where your Social Security benefits will offset your workers’ compensation settlement, you may want to consider consulting an attorney. An experienced Orange County workers’ compensation attorney can help you structure the settlement to reduce your tax payments over time. With a settlement structure, you may be able to completely remove your tax liability, even if your compensation is coming primarily from Social Security benefits.

What Other Tax Issues Might I Face if I Have Workers’ Compensation?

• If you retired as a result of an illness or injury that leads to a workers’ compensation claim, your additional retirement benefits will still be taxable.

• You may receive interest payments as well as your primary settlement. An insurance company delay or other misconduct may lead to compensation with interest. If you do receive interest, that amount is eligible for taxation.

• When a worker dies as a result of his job, surviving members who receive benefits through workers’ compensation do not have to pay taxes on that amount.