Is Workers Comp Taxable?

If you currently receive workers compensation benefits or you plan to apply for workers comp benefits after a work-related accident, injury, or illness, you may ask “is workers comp taxable?”

The answer according to IRS is that a small part of workers comp benefits may indeed be taxable, but very few injured employees actually pay taxes on it.

That’s why most people consider workers compensation monetary benefits as tax-free income for federal and state tax purposes.

Workers comp benefits aren’t usually considered as taxable income on a federal or state income tax return.

A single exception arises when the taxpayer also receives social security disability benefits (SSDI or supplemental security income (SSI).

In some instances social security administration (SSA) may lower the amount of SSDI SSI received by the disabled individual to bring disability payments below the required threshold.

SSA calls this calculation the workers compensation offset.

How Is Workers Comp Taxable?

Workers comp benefits are taxable in the same amount SSA reduces the injured beneficiaries disability payments.

Therefore, if SSA reduces the monthly SSDI payment by 250$ because of workers comp offset, then 250$ of the workers comp benefit is considered taxable.

Many beneficiaries receiving social security and or workers compensation benefits don’t earn a lot of money and many don’t earn enough to IRS federal taxes.

Even if a small portion of workers comp benefits are considered taxable the injured disabled worker probably won’t owe money to the federal government.

If the injured worker or his or her spouse has a source of income other than workers comp or SSDI benefits, it’s possible to necessitate federal tax payments on SSDI.

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When will be the workers comp taxable?

Here’s an example: Disability benefits may be subject to taxes when the disabled person’s income is higher than the reference limits. Disability benefits are then taxed at the taxpayer’s marginal tax rate.

This means instead of paying taxes of half to 85 percent of benefits income, you’d probably pay tax of approximately 10 to 15 percent on half to 85 percent of benefits income.

Someone earning a higher income might pay tax of 33 to 35 percent on up to 85 percent of benefits.

In Which USA States Is Workers Comp Taxable?

Most USA states don’t tax the disabled individuals benefits but several tax them in similar fashion to the USA government.

For instance Montana, New Mexico, and Utah fully tax social security benefits whereas Minnesota, West Virginia, Nebraska, Vermont, North Dakota, and Rhode Island tax social security benefits at the federal rate.

How to reduce workers comp tax?

Individual taxpayers may apply related credits and or deductions to benefits earned.

Consult a CPA or financial advisor about disability and workers compensation benefits planning questions.

SSDI beneficiaries typically receive a lump sum back pay amount for past due payments SSA owes the beneficiary.

Because the lump sum back payment is paid in one tax year, the recipient’s tax rate may rise due to the lump sum payment.

Video: Is Workers Comp Taxable?

I hope, now you have a clear idea about “is workers comp taxable?”

Having any questions or suggestions, please feel free to comment below.

FAQs

*References: https://www.dol.gov/general/topic/workcomp