If you have received workers’ compensation due to a workplace injury, the question of taxes may come up sooner or later. You may wonder if those benefits are taxable. If you are receiving a wage differential or disability benefits, will you have to report those on your return?
The simple answer is these benefits are not taxable. You can receive benefits through workers’ compensation without fear of it impacting your taxes—at least in most scenarios. There is one exception to this rule, and it involves Social Security.
Workers’ Compensation and Social Security
To understand how this works, first, it’s important to look at how workers’ comp and Social Security interact.
Under federal and state law, you can receive both workers’ compensation and Social Security benefits, including either Social Security disability insurance (SSDI) or Supplemental Security Income (SSI). However, the combined total of both workers’ comp and Social Security may not exceed 80% of your average current earnings.
For example, if you normally earn $2000 per month and currently receive total disability benefits, then the maximum amount you could receive from both TTD and SSDI is $1600 per month. If the combined total would exceed that amount, then one of them needs to be reduced. In Illinois (as well as most other states) the difference is subtracted from your Social Security benefits.
In the above example, if you receive about $1000 per month in TTD and were also receiving $900 per month in SSDI, then your Social Security benefits would be reduced by $300.
Taxation on Workers’ Compensation
So what does this have to do with taxes? Under federal tax law, the amount by which your SSDI or SSI is adjusted is considered to be taxable. In essence, that means your workers’ compensation benefits would be reported with your regular taxable income.
In the example given above, that would amount to $300 of your benefits each month being taxed. If your benefits last over the course of 9 months, that would amount to $2700 which would be added to your taxable income when you file for the year.
If your workers’ comp settlement was received in a lump sum, then the amount should be prorated over the course of your lifetime. The settlement will have to be structured in a way that demonstrates that. Otherwise, you may end up paying extra taxes on it.
Odds of Paying Taxes
If you are receiving both Social Security and workers’ compensation benefits, then you will likely have an amount added to your taxable income. However, the majority of people who receive these benefits don’t earn enough to have to pay taxes at all. This means that it likely won’t make any difference to you whether this income is taxable or not.
If you aren’t sure, or if you are currently seeking compensation for a workplace injury, then you will need to contact an attorney with experience in both Illinois workers’ compensation and tax law. Hart David Carson LLP can help you keep your tax exposure down while also obtaining the benefits you deserve, so contact us for the legal assistance you need.