Will I have to pay taxes on Workers' Compensation benefits?

laptop with work comp form on table

Workers' Compensation benefits help workers pay for their medical treatment and help them with lost wages as they recover from an injury.  Workers' Comp ultimate goal is to help workers get back on their feet and back to the workplace.  For most people Work Comp benefits are necessary to make ends meet during this time and they shouldn't have to worry about whether they will have to pay taxes from these benefits.  

Most of the time these benefits will not be taxed by the IRS. The benefits you receive from Workers' Comp are used for necessary expenses (medical and paying bills) and not to make extra money.  And so for this reason it's not taxable.  Usually, you will receive only a portion of your lost wages for Workers' Comp so the IRS understands this and does not tax these benefits. 

It can get a little complicated.  If you receive both Social Security Disability as well as Workers' Compensation, you may have a portion of your benefits taxed. If the combination of the two equals 80 percent or more of your normal average income, your Workers' Compensation will be reduced by the amount over 80 percent.  In this case, the Workers' Comp benefits are taxable.  

For example:  You earn $3,000 per month at your job before your injury. The combination of your Work Comp benefits and Social Security Disability amount to $2,500.  If we take 80 percent of $3,000 we get $2,400 and so you would be $100 over that amount.  Your Social Security benefits would be reduced by $100, and $100 of your Workers' Compensation benefits will be taxable income.  

If you make under a certain amount of money total, your Social Security benefits may not be taxable. For a single person the income limit is $25,000 per year and for a married couple $32,000.  Making less than this with all of your income (including half of your Social Security benefits) you would not pay taxes.  

Workers' Compensation can be very complex in some cases and adding tax issues can make it even more so.  Talking to an experienced Workers' Compensation attorney can help you with these types of issues and make sure you are getting the benefits you deserve.  Call us to schedule a free consultation.  We are happy to meet with you and advise you in your case.