Workers Compensation

Will My Workers' Compensation Benefits Be Taxed?

By Sachi Barreiro, Attorney, University of San Francisco School of Law
Workers' comp benefits are taxed only in limited circumstances.

Workers’ compensation benefits are generally not taxed under federal or state law. The one exception to this rule is if you are receiving both workers’ comp benefits and Social Security disability benefits. In that case, your Social Security disability benefits may be reduced (or “offset”) to account for your workers’ compensation benefits. The offset is taxable income.

Will I Receive an Offset?

Not everyone will receive an offset. An offset occurs only if your combined benefits through workers’ compensation and Social Security disability are more than 80% of your average regular earnings. For example, if you earned an average of $2,400 per month before your work accident, your combined benefits cannot exceed $1,920. If your combined benefits do exceed this amount, either your Social Security disability benefits or your workers’ comp benefits will be reduced.

How Does the Offset Work?

In most states, your social security disability payments will be reduced to account for your workers’ comp benefits. Continuing with the example above, suppose that you are eligible for $1,200 a month in workers’ comp benefits and $1,000 a month in Social Security disability benefits, for a total of $2,200. However, under the 80% rule, your combined benefits cannot be more than $1,920 (80% of $2,400). As a result, your Social Security disability benefits will be reduced by $280 ($2,200−$1,920). You will receive $720 in Social Security disability benefits and $1,200 in workers’ comp benefits each month.

In a minority of states, including Florida and New York, the offset happens in the reverse. The same rules apply, but your workers’ compensation benefits will be reduced instead of your Social Security disability benefits.

Why is the Offset Taxed?

Social Security disability benefits, unlike workers’ comp benefits, are taxable income. So, as you might expect, the $720 you receive in Social Security disability benefits will be subject to tax. However, the $280 offset will also be subject to tax. Federal law treats this amount as if you had received it as Social Security disability benefits, even though you received it through workers’ comp.

Is the Offset Always Taxed?

Social Security disability benefits are taxed only if the recipient’s “combined income” is more than $25,000 for an individual or $32,000 for a married couple. Your combined income is one-half of your Social Security disability benefits plus any other income you received for the year. If you don’t receive more than these threshold amounts, none of your benefits will be taxed.

How Can a Lawyer Help?

If you’re receiving Social Security disability benefits, you will want to consider how a workers’ compensation settlement will affect your benefits. A lawyer can help you determine what your tax liability will be and can structure the settlement to minimize any offset that you might receive. To find out more, consult with an experienced workers’ compensation attorney.
Have a workers compensation question?
Get answers from local attorneys.
It's free and easy.
Ask a Lawyer

Get Professional Help

Find a Workers Compensation lawyer
Practice Area:
Zip Code:
 
How It Works
  1. Briefly tell us about your case
  2. Provide your contact information
  3. Connect with local attorneys
MAKE THE MOST OF YOUR CLAIM

Get the compensation you deserve

We've helped 265 clients find attorneys today

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you