Employees who become hurt or sick on the job can collect workers’ compensation payments. These benefits compensate the injured party for their medical bills, lost wages, and other damages resulting from the accident. You may be concerned about paying taxes from your workers’ compensation settlement or benefits. The quick response is “no.” Make sure you contact a workers compensation lawyer in phoenix to learn more.

Can You Write Off Paying for It?

Since there is no corresponding tax on workers’ compensation payments, they cannot be deducted. The amount of any workers’ compensation awards or settlements you receive is normally free from taxation by the Internal Revenue Service (IRS).

Inexpensive Perks

Workers’ compensation benefits typically cover two-thirds of your normal pay or wages. If the compensation you get is paid under a workers’ compensation act or a similar statute, the IRS rules state that you do not have to pay taxes on that money. 

Worker’s Compensation Tax Exemption

There is an exception to the rule that workers’ comp benefits are not taxable. Some of your workers’ comp benefits may be decreased if you also get Social Security Disability Insurance (SSDI) benefits. 

What Circumstances Trigger the Offset for Workers’ Compensation?

If your combined workers’ comp and SSDI benefits amount to more than 80 percent of your normal pre-injury earnings, your SSDI benefits may be reduced or eliminated. This temporary compensation cut from SSDI will ensure you do not exceed the 80 percent mark. 

What Are the Limits for Taxable Income?

Limits on taxable income are often difficult to understand. In most cases, a person’s Supplemental Security Income (SSI) benefit will be lowered if they are receiving both workers’ compensation and Social Security. If the recipient’s annual income is above a specified threshold, a portion of their SSDI benefits may be subject to taxation. 

Worker’s Compensation Payments: Additional Costs to Think About

Remember that if you settle your workers’ compensation claim, expenses like your attorney’s costs and outstanding medical bills may be removed from your final amount. You should consult a lawyer before agreeing to any settlement so that you are aware of any potential deductions.

The insurance company may try to insert language into the settlement agreement that would classify the money as income. 

Workers’ Compensation-Related Taxes

Retirement payments are subject to taxation, but workers’ compensation payouts are not. Retirement payments based on age or years of service are subject to taxation regardless of whether the retirement results from a work-related injury or illness. The interest portion of workers’ comp benefits is taxable if you receive it. Wages earned while performing light duty and collecting workers’ compensation disability payments are considered taxable income.