If you are injured on the job, workers’ compensation pays your medical bills and income benefits until you are able to return to work. In the majority of cases, the benefits are excluded from your taxable income. However, those who receive Social Security disability payments may have to pay tax on a small percentage of their workers’ compensation benefit some cases.

Eighty Percent Earnings Cap

If you receive Social Security Disability Insurance (SSDI) as well as workers’ compensation, the Social Security Administration will cap the combined benefit your receive at 80 percent of your average current earnings. The SSA applies some fairly complex rules for determining your average current earnings but, for most people, this will simply be your gross monthly pay check. To apply the cap, the Social Security Administration simply lowers your disability payment until your combined benefits fall below the threshold.

Taxing the Workers’ Compensation Offset

Workers’ compensation “offset” is the amount by which the SSA reduces your disability benefits. By law, you must pay tax on the offset. For example, suppose you earn $3,000 per month. After a work-related accident, you are entitled to monthly benefits of $1,500 SSDI and $1,000 workers’ compensation. Eighty percent of your average wage is $2,400 — the benefits and compensation you receive exceeds your average wage by $100. Therefore, the SSA will reduce your disability benefit by $100 per month to $1,400. On your tax return, you must declare the $1,400 SSDI and the $100 workers’ compensation offset as taxable income.

Even After the Offset, You May Not Pay Tax

Only taxpayers who receive an annual “combined income” of $25,000 or more pay tax on their Social Security benefits. Your combined income is half of your Social Security benefit plus all the other income you received during the year. Few people who receive workers’ compensation and Social Security benefits have enough taxable income to owe federal taxes, so the offset is very low or non-existent in the majority of cases.

Avoiding the Tax Offset

If you are flying close to the tax threshold, tell your workers’ compensation attorney. He should be able to structure your workers’ compensation insurance settlement in a way that reduces the offset and, therefore, your taxable income. If the insurance company drags its heels and you don’t receive your settlement for many months, you should also receive interest on your benefit payments. The interest is considered taxable income and will form part of your tax return unless it is cleverly structured by your lawyer.


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