If you get hurt on the job, workers compensation can be a life-saver. And most of the time, once you've been awarded workers compensation, it's pretty simple to handle the monthly or lump sum payment. Workers compensation payments aren't considered earned income, which means that you don't usually have to worry about paying taxes on them. However, there are a few situations where workers compensation payments may affect your tax situation. Take a look at what you need to know about how workers compensation and your taxes.
The Social Security Offset
One instance when workers compensation may affect your taxes is when you're collecting Social Security Disability or Supplemental Security Income. The reason that your tax situation may change if you're getting workers compensation and Social Security benefits has to do with something called the Social Security offset.
When you're collecting Social Security benefits, you're only allowed to get a certain amount of money every month. Depending on what your current benefit amount is and how much workers compensation you're awarded, the combined total may exceed the amount that you're allowed to receive. In this case, your Social Security payments will be reduced in order to bring your income back to within the allowable income range. This is the Social Security offset. Your limit is either 80% of your average income before your injury, or the combined total of all the SSDI payments received by members of your family during the first month of your workers compensation benefits.
How does this affect your taxes? You may be taxed on the portion of your workers compensation that's replacing the amount that's being withheld from your Social Security benefits. For example, if your maximum allowable income is $2000 a month, and you were getting $1800 in social Security benefits, then you received $500 a month in workers compensation benefits, that would add up to $2300 -- $300 over your maximum limit. In that case, your Social Security benefits would be reduced by $300, and $300 worth of your workers compensation might be considered taxable. However, that amount will only be taxable if you make more than a certain amount. If you earn less than $25,000, or $32,000 if you're married, your benefits will still not be taxable.
Workers Compensation Interest Payments
Another situation that may arise is when you receive interest payments with your workers compensation. This can happen if it takes a long time to receive your benefits. Sometimes workers compensation claims are quick and easy, but occasionally there are delays or disputes that have to be settled in court. When that happens, you may be able to receive interest on your payments.
While the workers compensation payments themselves remain untaxed, the interest will be considered earned income and subject to tax. If you receive a lump sum, it's important that you know exactly how much of it is your workers compensation payment and how much is interest on the delayed payment so that you can report the amounts to the IRS correctly. Otherwise, you could end up overpaying or underpaying.
Depending on your injury, you may be able to return to work at some point before you've fully recovered. In that case, you may not be able to perform all of your duties, and your employer might assign you partial duties or have you work in a different, less-strenuous capacity until you're completely healed. This is often called light duty or light work.
When you're on light duty, you may work fewer hours or receive a lower wage because of your reduced duties, in which case you'd still be eligible for partial workers compensation payments until you were ready to resume your former job duties and position. That means you'll receive a paycheck and workers compensation at the same time. Your workers compensation is still not taxable when you're on light duty, but it's important to note that your paycheck for your hours working light duty is considered earned income and is taxable.
Understanding how workers compensation intersects with your other income and affects your taxes can prevent a costly mistake. A workers compensation attorney can help you navigate complex workers compensation claims and explain how they affect your overall financial picture. Click here for more info on this topic.