Are Workers’ Compensation Benefits Taxable?

Tax day is quickly approaching. We wanted to answer a question commonly asked by our clients: Are workers’ compensation benefits taxable?

Luckily, worker’s compensation benefits in California are considered non-taxable income. Workers’ comp. is a public, federally funded benefit designed to help employees settle their bills as they recover from a work-related illness or injury. These benefits fall within the same category of other non-taxable income, such as public welfare fund payments, compensatory damages, disability benefits, and compensation for the permanent loss of or use of a body part.

Exception to Tax-Exempt Status

There is one situation in which a portion of these benefits might be taxed. It’s important to be aware of this exception, and determine if your circumstances classify your benefits as taxable.

Workers’ Comp & Social Security Overlap

People who receive both workers’ compensation benefits and Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) can be taxed for their workers’ comp. The taxation will generally not apply to all you have received that tax year, though. Instead, it should apply to a portion determined by the offset to your SSDI.

In California, if you’re receiving workers’ comp and Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), and when put together the benefits surpass 80% of your average current earnings of pre-injury or disability income, the SSDI benefits will be offset (or reduced). In other words, the Social Security Disability benefits offset any form of income that exceeds this limit. It’s worth noting that Social Security retirement benefits are not affected by the offset.

For Example

You receive workers’ compensation of $500 a month and SSDI of $500 a month, but the Social Security Administration (SSA) determines you only require $800 of income a month to live comfortably. Your SSDI check is therefore reduced to $300 each month to offset the amount. You would only be taxed on $200 worth of workers’ compensation each month.

Other Tax Situations

Returning to Work

Most individuals who collect workers’ compensation benefits eventually return to work. Some even perform light work and earn wages while continuing to receive their workers’ compensation benefits. It’s important to note that any wages you earn while you’re still obtaining workers’ comp benefits for your injury are treated as taxable income.

Retirement

If you retire as a result of an illness or injury that leads to a workers’ compensation claim, your additional retirement benefits will still be taxable.

Additional Income

Keep in mind that just because workers’ compensation benefits are not taxable, does not mean other income you receive is free from taxation. Retirement benefits, investments, and money obtained through inheritance or won in lawsuits are all still subject to taxation.

Each person’s tax situation is unique, and the above information is not intended to be tax advice for your specific circumstances. If you’d like to learn more about tax implications for your workers’ compensation benefits, you should consult with a workers’ compensation attorney or tax professional.

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Cole, Fisher, Cole, O’Keefe + Mahoney is Central California’s leading workers’ compensation and social security disability law firm. With over 30 years of successful experience, we are committed to securing maximum benefits for our clients in the Fresno, California area. Schedule a free consultation today.