If you are receiving workers’ compensation benefits after an injury or illness on the job, you may be wondering how your tax return will be affected. Fortunately, workers’ compensation benefits are tax-exempt with only rare exceptions.
Whether you receive a lump sum or bi-weekly workers’ compensation benefit payments, it is not considered taxable income. Therefore, the benefits will typically not affect your tax return. In addition, since you do not have to include them when filing taxes, you will not receive any tax documents related to the benefits. As a result, you will not need to file taxes if you received workers’ compensation benefits for an entire tax year. The rare exceptions only typically apply when an injured or ill worker is getting both social security disability benefits and workers’ comp benefits or also subsidizing their income by taking money from a 401k or retirement plan.
Injured or ill workers are eligible to receive Social Security Disability Insurance (SSDI) benefits in addition to workers’ comp benefits. However, when receiving them simultaneously, the Social Security Administration will generally reduce disability benefits so that your total compensation does not exceed more than 80% of your previous wages. This process is known as offsetting.
For example, suppose you are entitled to $1,000 in workers’ comp benefits and $1,200 in SSDI benefits, for a total of $2,200 a month. Let’s say you earned $2,500 per month before you became disabled, which means you can earn up to 80% or $2,000. Since your benefits total exceeds 80% of your regular wages, SSDI will be reduced by $200.
SSDI benefits are taxable income, unlike workers’ comp, so you can expect to receive tax documents and file a tax return for that portion of your income. To ensure you meet your tax obligations, it is best to meet with a certified tax professional who can advise you on the requirements and implications of your exact situation.
Workers’ compensation benefits can still influence your tax return in other ways. For instance, if you are married and typically file a joint tax return with your working spouse, you may be placed in a lower tax bracket since workers’ comp benefits are not reportable income. This would lower your overall tax obligation, which in turn, will reduce your joint tax return compared to years prior when both of you worked for entire tax years. However, if you returned to work even on light duty, you will owe taxes accordingly.
If you or a loved one has any questions regarding workers’ compensation benefits and how they can affect your tax return, our Orange County disability & workers’ comp attorney can be a great resource. We offer free consultations and can also make sure you are receiving the compensation that you need.