Workers’ compensation is a type of accident insurance paid by employers in the event of an employee’s on-job injury or work-related illness. The employee is not required to make any contributions to this insurance from their own salary. Workers’ compensation covers associated medical expenses and provides wage-loss compensation until the employee is able to return to work.
A private insurance company or state-run workers’ compensation fund will usually pay the employee these benefits. Workers’ compensation also extends to an employee’s dependents, should the workplace injury result in the employee’s death.
Since workers’ compensation is a payment you oftentimes receive in lieu of a salary, it can be confusing as to whether or not a workers’ comp settlement is taxable income in Kansas and Missouri.
Is Workers’ Compensation Considered Income When Filing Taxes?
According to the 2018 Publication 525 from the IRS, amounts received from workers’ compensation for work-related injury or illness are exempt from tax when paid under the workers’ compensation act. In the event of a worker’s death, this applies to their survivors, as well.
This means, there is no tax or tax rate for workers’ compensation income. Additionally, workers’ comp does no send out W-2 forms.
What Are Special Cases Where Workers’ Compensation is Taxable?
There are certain cases where workers’ compensation is either partially or fully taxable. These instances typically come into play when you return to work or when you are utilizing other benefits.
If You Are Injured and Go Back to Work at Your Pre-Injury Job, Is That Taxed?
Workers’ compensation benefits are intended to cover wage loss until you are able to return to work. If you return to work after a work-related injury, the wages you receive are taxable.
Is the Income Taxed If You Acquire a Different Position Post-Injury?
If you return to work after a work-related injury and take on a light-duty position, the wages you receive are taxable. For example — if you are a janitor and you are injured on the job, your employer may offer you a desk position instead. The wages you earn working the desk position would be taxable.
If You Retire After Sustaining a Work-Related Injury, Are Your Retirement Benefits Taxed?
Whether you retire based on prior contributions, length of service, age, or even due to injury or illness, the tax exemption does not apply to retirement plan benefits.
If You Are on Social Security Disability, How Does the IRS Handle Taxes for People Under These Conditions?
According to the 2018 Publication 525 from the IRS, if your disability pension is provided for service-connected disabilities, part of the payment may count as workers’ compensation and is, therefore, not taxable. The part of your pension based on years of service, however, is taxable. The same applies to your survivors’ benefit in the case of your death — the portion that serves as a continuation of the workers’ compensation benefit is not taxable.
In this case, some of your benefits are taxed, and some are not. The portion of your benefits from workers’ compensation, in this case, is not taxable while the portion from your disability pension is.
What Are the Regulations for Simultaneously Collecting Social Security and Workers’ Compensation Benefits?
If you receive both workers’ compensation and Social Security disability insurance benefits, the benefits you receive from Social Security may be subject to tax. The amount received from workers’ compensation would still be exempt from taxes. When receiving both workers’ compensation and Social Security disability insurance benefits, you may be subject to an offset.
What Are Workers’ Compensation Offsets and Reverse Offsets?
In addition to workers’ compensation benefits, workers injured on the job may also qualify for Social Security disability insurance benefits. The Social Security Act established in 1965, however, determines that the combination of the workers’ compensation and Social Security disability insurance benefits should not exceed 80 percent of the worker’s average current earnings. This results in a reduction of the Social Security disability insurance benefits, known as an offset.
For example: If your average current earnings were $5,000 per month and you receive $2,500 per month from workers’ compensation as well as $2,750 per month in Social Security disability insurance benefits, your Social Security disability insurance benefits would be reduced by $1,250.
The total amount of benefits you receive is $5,250, but your benefits cannot exceed 80 percent of your average current earnings, which would be $4,000. The reduction of $1,250 would, therefore, be taken from your Social Security disability insurance benefit, making the payment $1,500.
Social Security disability insurance benefits do not have to be for the same injury or illness as the workers’ compensation benefits for an offset to be applied. The reduction to the Social Security disability insurance benefit will continue until you reach your full retirement age. It is important to report any changes in the amount of your workers’ compensation payment to Social Security, as it is likely to affect how much Social Security disability insurance benefits you receive.
According to the Social Security Administration, certain benefits are excluded from workers’ compensation offsets, like:
- All Department of Veterans Affairs’ benefits.
- Needs-based benefits.
- Federal, state or local disability benefits that are based on employment that was covered by Social Security.
- Private pension or private insurance benefits.
When provided for, a reverse offset may apply. In workers’ compensation, a reverse offset is a reduction to the workers’ compensation payment received by the worker filing the claim as opposed to a reduction in their Social Security disability insurance benefit. If a reverse offset is provided for by the state workers’ compensation law or plan, the Social Security disability benefit will not be reduced.
Maximize Your Benefits With William L. Phalen
In most cases, the workers’ compensation benefits you receive from an on-job injury or work-related illness are exempt from tax. However, there are some nuanced areas where this is not the case.
To better understand tax laws for workers’ compensation, consider working with The Law Office of William L. Phalen, where you will receive personalized attention from attorneys that have a long track record for helping clients and are available when questions and concerns arise.
At Phalen Law Firm, we are workers’ comp experts who are willing to help in the event of a workplace injury case. We want to make sure you receive fair compensation for your work-related injury. If you want to file a claim, or if you feel you haven’t received appropriate compensation, we are here to help. Contact us for a free consultation to discuss your options.