Your clients probably wonder if workers’ compensation benefits are taxable and will seek answers. Well, the short answer to that is no. In general, Workers’ Compensation Benefits are not taxable on either the federal or state level. If your client receives workers’ compensation benefits, they do not have to report them as income on your tax return and pay federal or state income taxes on them.
The IRS’ Publication 907 confirms that payments received for occupational sickness or injury under a Workers’ Compensation act or similar law are typically not subject to taxation. The tax exemption generally applies to lump sum settlements, structured weekly wage loss payments, and benefits paid to any individual who receives death benefits under workers comp.
But when can workers’ compensation benefits be taxable?
Determining Workers’ Compensation Benefits Eligibility
Determining whether or not workers’ compensation benefits are taxable can get tricky when combined with Social Security Disability Insurance (SSDI) or other retirement plans. Any extra benefits you receive from SSDI, Supplemental Security Income (SSI), or other retirement programs may be taxable at the applicable rate.
When an injured worker receives disability benefits like SSDI or SSI, the Social Security Administration (SSA) may lower the amount of the disability payments to ensure the combined amount of workers’ comp benefits and disability payments doesn’t exceed a specific threshold. The SSA calls this an “workers’ compensation offset.”
What is Workers’ Comp Offset?
If your client is receiving Social Security Disability Insurance (SSDI) benefits and workers’ compensation benefits, they may experience a reduction, or “offset,” in their SSDI benefits. The reduction happens if the combined benefits exceed 80% of your client’s earnings before becoming disabled. It’s important to note that this offset doesn’t apply to Social Security retirement benefits, only SSDI.
To understand the concept better, let’s take an example. Say an individual is entitled to $1,350 in SSDI benefits and $900 in workers’ comp benefits for $2,250 per month. If their pre-injury earnings were $2,450 per month, the combined benefits would be more than 80% of that amount ($2,250/$2,450 = 91.84%). That means the SSDI benefits would go down by $290 to bring the combined benefits down to 80% of $2,450, or $1,960.
If that happens, $290 of the monthly workers’ comp benefits could be subject to taxes if their total income for the year is high enough.
About Insure My Work Comp
Insure My Work Comp provides you with workers’ compensation insurance quotes from top-rated insurance companies. They also help small business owners with a quick and easy way to find affordable workers’ compensation coverage. With Insure My Work Comp, you can also get group disability insurance along with your employee benefit package.