If you are injured on the job, you may be able to receive workers’ compensation benefits. In addition to receiving medical treatment related to your injury, you may also qualify for wage replacement income. You may worry about your tax liability when receiving these benefits. It is important to understand the tax treatment related to workers’ compensation benefits and to seek guidance from an experienced workers’ compensation lawyer.
Taxation on workers’ compensation monetary benefits
Generally, taxes are not paid on wage replacement income paid based on a workers’ compensation act or statute because of a work-related injury or illness. At the state and federal level, workers’ compensation benefits are not usually considered taxable income. Usually, benefits are equal to two-thirds of the worker’s average weekly wage. Taxes are not withheld on these benefits. In this sense, a person may receive close to the same amount of net income through the receipt of these benefits. Survivors’ benefits also are not usually taxable.
However, there are some exceptions regarding when a portion of workers’ compensation benefits may be taxable.
If a worker is able to return to work with work restrictions, he or she may qualify for partial workers’ compensation benefits based on the difference between regular earnings and the earnings for the modified work. The amount of wages is still taxed as normal while the workers’ compensation benefits are not taxed.
Workers’ compensation offset
An exception to the taxation treatment is if an individual receives Social Security Disability Insurance or Supplemental Security Income disability benefits. In some situations, the Social Security Administration might reduce a claimant’s disability benefits so that the combined amount of workers’ compensation and disability benefits remain below a certain threshold, known as the workers’ compensation offset.
In these situations, the amount of the disability benefits that are reduced equates to taxation in the equivalent amount of workers’ compensation benefits. For example, if the SSA reduces your monthly SSDI benefits by $300, then $300 of your workers’ compensation benefits are taxed.
This offset applies when the combined amount of workers’ compensation benefits and SSDI or SSI benefits exceed 80 percent of a worker’s average current earnings.
A workers’ compensation attorney may be able to minimize this offset by carefully structuring the workers’ compensation settlement. For example, a lump sum settlement agreement may state that it shall be spread out through your lifetime. The monthly rate may be identified in the settlement agreement. This tactic will help to make the monthly rate smaller so that you may be able to receive both forms of payment without exceeding the threshold amount.
Additionally, SSA subtracts legal fees, payments to dependents and past and future medical expenses before calculating the amount of the offset. A well-written settlement agreement will specify each of these various damages so that the total amount will not be considered for the offset.
Retirement benefits that you collect are not exempt from taxation, even if you had to retire because of a work-related injury or illness that was compensated through the worker’ comp system.
Contact a Board Certified Florida workers’ compensation lawyer for help maximizing your award
If you are concerned about the potential tax implications of your workers’ comp award, it is important to consult with an experienced Florida workers’ compensation lawyer. I’m attorney Joseph Rooth. Since 1994, I’ve helped injured workers obtain the benefits they deserve from workers’ compensation. I guide you on how to structure your workers’ compensation settlement, so any offset is minimized and your taxable income is reduced. Contact us online or call 727-849-3400 for more information. I represent injured workers on a contingency fee basis, so I do not charge up-front attorney fees. I charge no fees at all unless and until I am successful in obtaining benefits for you. Call now for more information.