Workers’ Compensation isn’t taxable, right?

by Karl Voigt

Workers’ Compensation wage loss benefits aren’t taxable, right?

Right!

Well, unless you’re also a Social Security Disability recipient. Then, things may get complicated.

We all know that workers’ compensation wage loss benefits are paid to injured workers. Simply stated, these benefits are not taxed by state or federal governments. We know that some injured workers also apply for — and receive — Social Security Disability benefits. Of course, the Social Security Disability Administration takes an offset — a credit — for workers’ compensation. That means that monthly Social Security Disability benefits are reduced by weekly workers’ compensation benefits.

So far so good.

Trouble comes, however, if Social Security Disability checks are not a household’s sole source of income. Social Security Disability is not taxable unless a worker’s income or a worker and spouse’s income exceed certain limits. One those limits are reached, Social Security Disability is taxable. Receipt of workers’ compensation may drive income over those limits. The tax due on Social Security Disability benefits is based upon the total amount of Social Security benefits to which a claimant is entitled, whether or not the workers’ compensation offset causes a reduction in the Social Security Disability amount. Workers’ compensation benefits may therefore be taxable as if they were social security benefits.

Problems arise because the IRS considers the amount offset for workers’ compensation as if it’s a Social Security Disability benefit.

So, let’s say you’re entitled to $15,000 a year in Social Security Disability benefits, but you only get $5000 because of a workers’ compensation offset of $10,000. How much of your Social Security Disability benefits are subject to tax? $5000? No! $15,000. Of course, this is only a problem if that amount causes your household income to exceed IRS limits.

So don’t be surprised if you receive a 1099 for your workers’ compensation benefits. Your workers’ compensation may be taxed!

For more information, see http://www.socialsecurity.gov/pubs/10018.html.

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Filed under Social Security, Workers' Compensation

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