Taxable income describes nearly every wage and payment type you’ve ever earned. So, you probably assume your workers’ comp payments are taxable income, too. The recent tax reform legislation created many new questions about what does and does not count as taxable income. Even professional tax preparers wading through the newest rules are scratching their heads!
Fortunately, we have some good news. In most cases, workers’ comp payments don’t count as taxable income. In other words, most WC benefits are fully tax-exempt. This is the case at both the state and federal level. However, there are two exceptions to this good news.
Two Exceptions That May Turn Your Workers’ Comp Benefits Into Taxable Income
Read on so you know exactly what to expect come tax time if the two examples below apply to you.
Taxable Income Exception #1: You Get Some Federal Disability Benefits
Do you get Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) and workers’ comp? If yes, then you’ll owe taxes on your workers’ comp payments. Further, the Social Security Administration ensures your combined workers’ comp and disability payments never go above a certain amount. Specifically, you can only receive up to 80% of your pre-disability earnings from both sources. To keep your income below this level, the SSA may lower your SSDI or SSI and you’ll owe taxes on your workers’ comp benefits.
Important: Even this exception won’t always apply. If you die while getting workers comp, your survivors don’t owe taxes on any benefits due to them.
Taxable Income Exception #2: You Took Early Social Security Retirement at 62
You may owe taxes on benefits you receive alongside your workers’ comp payments. For example, Social Security counts as taxable income even if your workplace injury made you retire early. Also, if you return to work while receiving workers’ comp, you will owe taxes. You may need to report WC payments as annual income if you previously deducted related medical expenses.
If You Aren’t Sure, Consult A Workers’ Compensation Lawyer
Since the rules about workers’ comp and income taxes constantly change, ask a workers’ comp lawyer about your unique situation. Attorneys who specialize in workers’ comp cases work on contingency, which means you don’t pay a fee unless you receive benefits.
Related: Workers’ Compensation Frequently Asked Questions
Laura Schaefer is the author of The Teashop Girls, The Secret Ingredient, and Littler Women: A Modern Retelling. She is also an active co-author or ghostwriter of several nonfiction books on personal and business development. Laura currently lives in Windermere, Florida with her husband and daughter and works with clients all over the world. Visit her online at lauraschaeferwriter.com and linkedin.com.