Is Workers Comp Taxable?

If you got hurt in a work-related accident, odds are that you have workers’ compensation insurance. In fact, any business or operation that employs at least one person or more must have this insurance under federal law. When it comes to receiving your settlement, you likely have several questions. One of these questions might be whether you have to pay taxes on workers’ comp payout. California compensation attorneys at Jones Legal can help answer this question and many more. Our goal is to help you navigate workers’ comp and its many areas while ensuring you get the compensation you deserve. Continue reading for how taxes affect a workers’ comp payout. 

Is Workers’ Compensation Taxable? 

Money received from a workers’ compensation settlement is generally not taxable. At state and federal levels, you don’t need to pay taxes on workers’ comp payout. According to the IRS Publication 17, any amount received as part of workers’ compensation for injury or illness are not subject to tax. However, there are a few exceptions and instances where you may need to pay taxes.

For example, there might be an exception if the individual also gains disability benefits through either SSDI or SSI. This is Social Security Disability Insurance and Supplemental Security Income. If the injured person receives both workers’ comp and disability payments, the amount attributed to disability can be taxable. 

There are also exceptions when it comes to retirement benefits. While the workers’ comp itself isn’t taxable, any employee receiving retirement payments may still get taxed on these benefits. 

Will I Get A 1099 For Workers’ Compensation?

A 1099 form is what the IRS refers to as information returns. This series of documents works as a report to list the various types of income received by an individual throughout the year. It includes separate types of income as well as your earnings paid to you by your employer. Separate income includes things like interest and dividends and government payments. 

The question of whether workers’ comp payments appear on a 1099 comes up often. The answer is no. This is because the purpose of a 1099 form is to determine what you need to pay taxes on. Since workers’ comp payouts are not subject to taxation, they do not need to appear on a 1099 form. 

How Is Workers’ Comp Reported To IRS?

Again, because it is not a taxable income, workers’ comp claims are not reported to the IRS. Whether you receive wage loss benefits on a continuous basis or a lump sum settlement, the money isn’t taxable. That means it does not need to get reported to the IRS. When receiving your workers’ compensation check, you will not find any tax notification documents. Nor is it necessary to list this information anywhere when filing your taxes. 

Is Workers’ Comp Counted As Income?

While workers’ comp is not taxable, it is still considered income. Workers’ comp falls into the same category of non-taxable income as the following:

  • Compensation for loss of use of function of a part of the body or for permanent disfigurement
  • Compensatory damages for physical injury or illness
  • Disability benefits under a car insurance policy of “no fault”
    • For loss of income or earning capacity due to the injuries
  • Payments from public welfare fund

SSI, Medicaid, cash assistance, and other benefits are only available to those with low-income. In determining eligibility for programs like these, money received from workers’ comp qualifies as income. If you fear that accepting workers’ comp would disqualify you from receiving these benefits, there is a way to keep both. Accept your workers’ compensation money in the form of a Special Needs Trust. This would allow you to continue receiving your previous benefits, but still accept workers’ comp. These expenses then might go towards personal care, a home, or a vehicle. 

Are There Exceptions To Tax-Exempt Status?

There are some exceptions for the tax-exempt status for workers’ compensation. If the injured employee gets both supplemental security income and workers’ compensation, they may end up having to pay taxes. Payments coming in from social security get reduced, and the difference created by the workers’ comp could be taxable. In the case that the difference is a small enough amount, it might end up being negligible for taxation. 

If a lawsuit holds up the compensation claim and the court approves a settlement, you may need someone to structure the payment to reduce taxation. This will be your compensation attorney.

Social Security and Workers’ Compensation Benefits

Social Security benefits might be taxable to an extent when you’re getting both disability and workers’ comp benefits. If your workers’ compensation reduces your Social Security, the part that gets reduced becomes treated as income. Therefore, it may be taxable. 

To calculate your payment, you can use the standard formula for Social Security benefits. To do this, add half the total of Social Security benefits to your other amount of income. 

The amount of taxes on workers’ comp payout that may come out is the same amount which Social Security will reduce your disability payments. So if your monthly SSDI check gets cut by a $150 offset, that means $150 of your workers’ compensation is taxable.

The reason this may occur is if the condition of an injured or ill worker ceases to improve or if they become disabled as a result. Disability insurance may become added on top of the workers’ comp payments they are already receiving. In this case, the SSA will reduce the payments by a certain amount and the difference from the workers’ comp paycheck can get taxed.

Contact Jones Legal Team For More Information

The workers’ comp system provides employees with a means to receive compensation for work injuries. And though compensation from these accidents is generally not taxable, there are still ways in which it could be. This is one of the many reasons you need a California workers’ comp lawyer.

In addition, these cases can be complex, and trying to navigate the system alone could be expensive. If your claim gets denied or if you fail to receive compensation, you need skilled legal assistance. Further, if you have the potential of receiving Social Security Disability and workers’ compensation benefits, it’s important to contact an experienced compensation attorney as soon as possible. Our attorneys at Jones Legal can work to structure your settlement in a way that reduces the potential workers’ comp offset. They will also work to minimize any taxes that may result from this. Call us today at 951-742-7213 or visit our website to schedule your free consultation.