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. 

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William L. Phalen

For 30 years, Bill Phalen has been representing families and workers whose lives have been devastated by workplace injuries, reckless drivers and the negligence of others. When tragedy needlessly strikes – because of the irresponsible behavior of an employer, corporation or an insurance company – Bill Phalen is an advocate for the people, always representing David in the fight against Goliath. Bill’s strong convictions have led to successful cases at the Court of Appeals and Kansas Supreme Court.

21:34 06 Aug 23
It has been a long road of recovery, very thankful for all they have done on my behalf, Bill and Melissa thank you for having my back and helping me get through everthing i have gone through in the last few years.
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13:21 28 Mar 23
Very nice employees. William is an awesome attorney if it had an option for 10 stars I would give him 10. I highly recommend him to anyone in search of a great attorney
Dorothy RuebelDorothy Ruebel
05:32 25 May 21
I highly recommend Mr Phalen. He and his staff did a great job! I could not have won my case without them.
Luke EmmotLuke Emmot
14:42 18 Dec 20
I was hurt at work and Mr Phalen took my case on and worked on it for over a year and was able to successfully get me a settlement check for my injuries. Hire him if you’re ever injured on the job!
Kelli StringfieldKelli Stringfield
21:06 01 Jul 19
If you need an excellent attorney around the Pittsburg area Bill Phalen is the guy to go to. Very knowledgeable and pleasant and the office staff is great. I wouldn't go to anyone else!
Levi DeWittLevi DeWitt
16:14 01 Apr 19
I've worked here as a student intern since August, 2018 and I must say that this has been the most enjoyable job I've had to date. Mr. Phalen and the gals working here are a pleasure to be around and work with. They are patient with me every time I'm slow to get the hang of a new task, they are relaxed and easy going but know how to get the job done well. They each put extra effort into all of the work they do for each and every client. Several times they have come in early or stayed at the office late to make sure that they got every done that they needed to prepare someone's case.The people in this office have been a part of this community for a lifetime and working with them has helped me feel as if I was a part of this great community as well.
Thomas HelmThomas Helm
16:52 27 Mar 19
Very Proud to call him my Attorney, very friendly staff, that always keeps me updated on my case and one phone call away to answer any questions. I have been using him for many, many years. I can't Thank him enough for what he has done and still doing for me and my family. But Thank you. Would highly recommend William Phalen.