Because the world of taxes and workers’ comp laws is confusing to wade through alone, learn your rights and the laws surrounding these issues. If you still have questions, talk to a lawyer with experience in these fields. You don’t want to make mistakes on your taxes, and you don’t want to pay too much. It’s your money, after all. Find out everything you need to understand what to do at tax time if you received workers’ comp benefits or a settlement the previous year.
Workers’ Compensation Laws in Kansas and Missouri
Each state has laws that direct employers and employees on how to handle workers’ compensation benefits and insurance. Because we serve Kansas and Missouri, we’ll cover the rules in these states. Find out more about the laws governing workers’ comp in these states in the sections below.
1. Workers’ Compensation Laws in Kansas
Employers should carry insurance to cover their workers in case of injuries. According to state law, employers should have workers’ compensation unless their total payroll equals $20,000 or less each year or operates in specific agricultural fields. They have three ways to do this:
- Join into an insurance pool of other employers for workers’ comp insurance
- Purchase insurance from a private company
- Become self-insured after applying to the Kansas Department of Labor the Division of Workers Compensation
To ensure full coverage of workers injured on the job, an employer may pay two-thirds of the employee’s weekly wages. The maximum amount owed for workers’ comp in Kansas is $627 weekly.
After an injury, you must wait one week before your workers’ compensation payments will kick in. At that time, the employer pays you no more than the maximum allowed.
Read More: Workers’ Compensations Benefits in Kansas
2. Laws Governing Workers’ Compensation in Missouri
In Missouri, all employers who have at least five employees must carry workers’ compensation. Exceptions to this rule include postal, railroad and maritime workers who have federal law governing their workers’ comp.
Similar to Kansas, employers in Missouri have three options for obtaining workers’ compensation:
- Purchasing private insurance
- Self-insuring if you meet the Division of Workers’ Compensation requirements
- Buying coverage from the state’s assigned risk pool
Like Kansas, workers’ compensation should pay two-thirds of the worker’s weekly earnings at the time of the injury. Compensation for death, permanent total disability or temporary total disability should reach 105% of the state’s average pay rate for the position. Benefits for those who have a permanent partial disability are 55% of the state’s average.
Like Kansas, Missouri has a waiting period before you can collect on your workers’ compensation. You will not get any payment for the first three days you have off work unless your total time off from the injury lasts longer than 14 days. If it does, you will retroactively receive payment for those first three days.
Read More: Workers’ Compensation Benefits in Missouri
What You Need to Know About Taxes and Workers’ Compensation
When it comes to paying taxes on workers’ compensation, federal law does not allow it, with a few exceptions. If you have received regular payments or a lump settlement for workers’ comp, you need to know what to do with that information when you file your taxes.
1. Is Workers’ Compensation Considered Income When Filing Taxes?
When filing your taxes, workers’ comp generally does not add to your earned income. It can result in you having to pay if the amount of compensation decreased your social security earnings. This exception will not affect you, though, if you do not get social security benefits.
If you cannot return to your old job but had to return to work doing light duty, the salary you earn from that work is a part of your income, and you should pay taxes on it. Depending on the nature of your workplace injury, you may have received workers’ comp and later returned to light duty. The workers’ compensation payment is not part of the money you pay taxes on, but the salary from your job, regardless of whether you worked regular or light duty, goes toward your taxable income.
2. Does Workers’ Comp Send Out W2 Forms?
Typically, workers’ comp is not a taxable form of income, and you should not receive an income reporting form that includes it. A W2 is one such form companies send out to their employees.
In rare cases, you may receive a W2 for the amount if your employer made a mistake. See if you can get an amended W2 from your employer. Use the fixed version of this form when filing your taxes.
If you cannot get an amended W2, you may have to fill in the amount on your taxes. Doing so ensures that you have reported all income listed on the W2, but you would use a negative amount for the workers’ comp you received because it does not contribute to your total income. It will go on line 21 on your 1040 as a negative, which lists other income, including the type. When factored into your taxes, you will end up subtracting the workers’ comp you received from your total income.
3. Do You Receive a 1099 for Workers’ Compensation?
A 1099-MISC is an income reporting form that employers use for independent contractors. Whether you are an employee or an independent contractor, you should not have to pay taxes on your workers’ compensation. Therefore, you should not receive a 1099 for the amount.
If you do get a 1099-MISC for your workers’ compensation, contact the company’s accounting department to see if they can send you an amended form. If not, contact a tax professional for how to deal with this error. Even as an independent contractor, you should not have to pay taxes on your workers’ compensation settlement.
Two instances when you may receive a 1099 form that includes information about workers’ compensation is if you get railroad retirement benefits or social security benefits.
The railroad retirement benefits form is the RRB-1099, which includes a box six that has a dollar amount for your workers’ compensation offset. You may notice that this amount is different from how much you got in compensation. This discrepancy is not an error. The amount reflects how much your workers’ comp decreased your social security equivalent benefit (SSEB) by. This amount will affect the total in box five on the RRB-1099, which is your net SSEB. You use this amount to determine whether you owe taxes.
For social security benefits, you should get an SSA-1099 form. In box three on this form, you will see the adjusted amount of your social security benefits, which includes the offset from any workers’ compensation that you received. Box 5, as in the RRB-1099 form, will have your net benefits from social security.
4. Is a Workers’ Comp Settlement Taxable Income?
Your workers’ comp does not count toward your taxable income in most cases. However, if you also receive social security benefits and workers’ comp, the combined amount cannot exceed 80% of how much you made before your injury. To keep from surpassing this amount, the Social Security Administration may reduce your benefits. If they do, you may owe taxes on the reduced amount, which falls under social security benefits.
For example, you receive $400 a month in social security benefits. In addition to that, you get workers’ comp. With the combined amounts, if your monthly benefits have to reduce to $300 a month, you will still pay taxes on the full $4,800 ($400 x 12 months) in annual social security benefits. Though $1,200 ($100 x 12 months) a year comes from your workers’ compensation, this portion becomes taxable because it offsets your social security benefits. This same formula works if you have offset railroad retirement benefits.
How to Know If Your Workers’ Compensation Benefits Are Affected by Taxes
Generally, you do not pay taxes on your workers’ comp benefits. As with everything in the tax code, though, there are exceptions to this rule. To find the correct answer to the question, “Is workers’ comp taxable income?” you need to consider all forms of income you have. If you have social security or a disability pension, you may have to pay taxes on a portion of the workers’ compensation. Find out more about these particular situations that only apply to some workers.
1. Social Security and Workers’ Compensation Offset Taxable Income
Filing taxes when you also receive social security or railroad retirement benefits requires some extra calculations to see if you should pay any taxes on your benefits. Using box 5 of either SSA-1099 or RRB-1099, you will fill in the information from worksheet A. This worksheet walks you through multiplying the amount from box five by one-half and adding it to your taxable and tax-exempt income. If the total is less than the base tax amount for your filing status, you do not owe taxes on your benefits.
2. Disability Pensions and Workers’ Compensation
Sometimes a company will combine your workers’ compensation with your disability pension. While workers’ compensation remains untaxed, you must still pay taxes on the retirement. Subtract out the workers’ compensation portion. The amount left over is your pension based on how long you’ve worked for the company. This amount is what you pay taxes on at the pension rate. Should you pass away, your survivors will not have to pay taxes on the workers’ comp portion they receive from your pension.
How to File Taxes on Workers’ Compensation Benefits
If you received workers’ compensation benefits, you likely don’t need to include them anywhere on your taxes. Typically, standard tax forms, such as the 1040, only require you to report taxable income. Since workers’ comp does not affect how much most people owe in taxes, you should not need to put it on your tax forms.
Because you don’t need to include it on your taxes in most cases, you likely won’t see information about your workers’ compensation benefits on forms you get about your income, such as your W2 if you’re an employee or a 1099-MISC if you’re a contractor.
However, if you get social security benefits, railroad retirement benefits or disability pensions, you will have a section on your tax forms such as SSA-1099 or RRB-1099 that includes any offset amounts. You will need to put this offset amount onto your taxes and use worksheet A to determine if the offset affects whether you need to pay taxes on the amount or not.
Filing is slightly different if you received a lump-sum workers’ comp payment that covers multiple years. You do not have to file amended returns on previous years if you get a lump payment, but you must include the taxable portion – if any – of the amount on the current year’s return. You will find the lump-sum payment in box 3 of either 1099 for social security benefits or railroad retirement benefits. The form will also show a listing of how much of the sum applied to each previous year. The exception to this is for RRB-1099, which does not breakdown the years and amounts before 2016.
To determine whether you will have to pay taxes on your lump sum, you need to fill out worksheet 1, which is for figuring your taxable benefits. You will then use worksheet 2 if you had a lump sum after 1993 or worksheet 3 for quantities before 1994. The last line from either worksheet 2 or 3 will go into line 20 on worksheet 4, which you use to figure taxable amounts on lump-sum benefits. Using the information worksheet 4 requests from worksheets 1 and either 2 or 3, you will be able to determine if you want to elect to report your benefits. If the amount on Worksheet 4 in line 21 is higher than line 19 on worksheet 1, you will need to include your benefits per the instructions on worksheet 1. Otherwise, you enter the two amounts from the two worksheets onto your 1040, and you will not pay taxes on the benefits.
Do You Still Have Questions? Ask Us at the Law Office of William L. Phalen
When you get workers’ compensation as a lump sum or in separate payments, you generally do not need to include it on your taxes. For those exceptional instances, such as when your workers’ comp affects your social security or disability pension, you may need to include the amount as taxable income. If you still feel uncertain about what to do when filing your taxes, let us know.
Trust us at the Law Office of William L. Phalen to help you with your legal questions on workers’ compensation or the taxes on your settlement. We know the law and can give you advice concerning your issues. Contact us for help with your injury and handling the legal aftermath.