Is a Workers’ Compensation Settlement Taxable?
In most cases, workers’ compensation settlements are not taxable, but there are exceptions if you receive other forms of income simultaneously, such as retirement benefits or wages from other work. The workers’ compensation attorneys at NST Law can help you determine whether to file a claim, when to accept a settlement, how to structure it, and the potential tax implications of your options.
Whether you are considering filing a workers’ compensation claim or already have one underway, it is essential to understand the tax implications of accepting a settlement offer. Most workers’ compensation benefits are not taxable, but there are exceptions if you receive other forms of income while also receiving workers’ comp.
If the amount you accept is above certain thresholds, you may have a tax burden if you also receive benefits from the Social Security Administration. Retirement benefits and wages you receive simultaneously with a workers’ compensation settlement are also taxable.
At NST Law, our trusted workers’ compensation attorneys can help you determine whether to pursue a workers’ compensation settlement, how to structure it, and how to minimize or eliminate your tax burden.
How does the IRS view workers' compensation settlements?
The IRS fully exempts workers’ compensation benefits from taxation if you receive them under your state’s workers’ compensation laws. You do not have to report workers’ comp on your taxes. This tax-exempt status also holds if a worker’s survivors receive the payments.
Since other income you receive may be taxable, you must understand the impact of these exceptions. The shifting tax burden may influence your decision on whether to pursue a claim or how to structure a settlement. Our workers’ compensation lawyers can help you determine how these exceptions apply in your specific case.
Exceptions to the Workers' Comp Tax Rules
The IRS views other forms of income you receive while collecting workers’ compensation as taxable. You have to report these forms of income and pay any taxes not already withheld.
You may retire because of a workplace injury or illness while also accepting a workers’ compensation settlement. Retirement benefits based on prior contributions, length of service, or age are taxable. They are not considered part of your workers’ compensation even though your injury led to your retirement.
Salary After Returning to Work
Some injured workers return to light duty while receiving workers’ compensation. You are not liable for taxes on workers’ comp benefits, but you do have to pay taxes on your wages from the light-duty work.
How a Workers' Compensation Settlement Affects Social Security Disability Benefits
The Social Security Administration offers two types of federal disability benefits. A workers’ compensation settlement can affect these benefits and your tax burden.
Social Security Disability Insurance (SSDI)
SSDI provides benefits for people with qualifying disabilities who have worked long enough and recently enough to qualify. Your combined workers’ comp and SSDI benefits cannot exceed 80 percent of your average monthly wage.
If your combined benefits exceed 80 percent, you are subject to offsets. Offsets are deducted from your SSDI benefits to get you back to the maximum combined benefits threshold. The offset amount is taxable.
Such taxable offsets are only a concern if one-half of your SSDI benefits plus other income exceeds the base amount for your filing status. If your combined benefits and income are less than $25,000 for an individual or $32,000 if you’re married and filing jointly, you don’t owe federal taxes, including your workers’ comp offset.
Supplemental Security Income (SSI)
SSI is for people with qualifying disabilities who have limited income and assets. There is no work history requirement. The SSI income definition includes any money you receive to meet your food or shelter needs, including workers’ comp. A workers’ compensation settlement could reduce or eliminate your SSI benefits.
Determining how a workers’ compensation settlement affects your Social Security benefits is complex. An experienced workers’ compensation lawyer from NST Law can help determine how a settlement affects your federal benefits and potential tax liabilities.
Types of Workers' Compensation Settlements
You may receive a structured settlement or lump-sum payments when you settle your workers’ compensation claim.
Structured settlements can be helpful if you need the financial stability of ongoing payments. For example, instead of accepting a lump-sum payment of $100,000 for your workers’ compensation claim, you could receive $5,000 monthly for 20 months.
You may receive a lump-sum settlement for your workers’ compensation claim with the court’s consent. The court must agree that the one-time settlement offer is in your best interest. The judge will also consider whether you can manage and control a larger lump sum wisely.
The type of settlement you receive may have different tax implications depending on the amount and the combination with your other forms of income, such as SSDI. If you don’t have another source of income and don’t receive federal benefits, your settlement is not taxable. Make your final decision on the type of settlement you wish to receive with the advice of one of our attorneys who is well-versed in workers’ compensation law.
How to Reduce Your Taxable Income From a Workers' Comp Settlement
For Social Security purposes, your attorney can help you avoid a tax burden through language in your settlement agreement. The Tennessee Workers’ Compensation Act allows you to specify that your settlement is intended for distribution over your lifetime when you have a permanent partial or total disability.
Mortality rates issued by the Centers for Disease Control and Prevention determine the monthly amount of your settlement that counts against your federal benefits.
For example, if you have a $200,000 settlement and an expected lifespan of 40 more years, your award is divided by 480 months for Social Security purposes. This calculation lowers the amount potentially deducted from your SSDI or SSI payments and reduces your chances of paying taxes.
Your workers’ compensation attorney can also help you by documenting your medical and legal expenses. The Social Security Administration deducts these expenses from your settlement amount to determine offsets.
Other Ways to Maximize Your Workers' Compensation Settlement
The steps you take from the moment of your injury can help you maximize your workers’ comp settlement. These actions and reducing your tax liability help ensure you have the funds to cover your lost wages and medical bills:
- Notify your employer of your injury and file a workers’ compensation claim soon after.
- Keep all records of your medical treatment.
- Seek a second opinion if you disagree with the diagnosis of a doctor chosen by your employer.
- Be careful of what you say to the workers’ comp insurance company if you don’t have a lawyer. It may try to misrepresent your words later to downplay or deny your claim.
The best way to protect yourself throughout the workers’ compensation claims and settlement process is to have our skilled workers’ compensation lawyers guide you.
How The Champions For The Injured at NST Law Can Help With Your Workers' Compensation Settlement
At NST Law, we work daily to be the voice of people who have been injured and deserve maximum compensation. More than half of our attorneys have achieved recognition as Super Lawyers for their excellent representation.
Our workers’ compensation verdicts and settlements include:
- More than $970,000 against a workers’ comp carrier that offered $18,000
- Almost $562,000 plus lifetime medical treatment for a worker whose claim was initially denied
If you need help deciding whether to pursue a workers’ compensation claim, guidance through the workers’ compensation claim process, or wonder how a settlement will impact your tax liability, contact our workers’ compensation attorneys today. We will use our over 32 years of experience to help you get the most from your workers’ compensation settlement.