Workers’ compensation benefits provide a certain amount of income to an employee who has suffered a work-related injury or illness. Although the general rule is that workers’ compensation will pay you two-thirds of your regular wages while you are out of work, this amount can be varied for workers with wages above and below certain legal thresholds. How much of this amount can the IRS tax?

What’s Tax-Exempt

The short answer to whether workers’ compensation benefits can be taxed by the IRS is ‘no’. This applies not only to benefits that you receive, but also to relatives who are eligible for survivor’s benefits when you die. Since these benefits are not taxable, in most cases your after-tax income will decrease by less than one-third, even though you are receiving only two-thirds of your pre-accident wages.

Modified Duty

If you return to work at lower pay due to modified duties or fewer working hours, workers’ compensation generally pays two-thirds of the difference between what you were making before the accident and what you are making now. Since this will entail a reduction in the amount of workers’ compensation payments you will receive, you will lose some of the associated tax benefit — you will still be taxed on the amount you are making after returning to modified duty.

The SSI/SSDI Exception

There is one exception to the tax-free rule with respect to workers’ compensation benefits, which applies if you receive workers’ compensation in conjunction with SSI/SSDI. If you are already receiving SSI or SSDI when you receive a workers’ compensation award, your SSI/SSDI benefits will be reduced to account for the amount you are receiving workers’ compensation.

The amount of workers’ compensation that replaces what you used to receive in SSI/SSDI benefits will be taxable, although it will amount to only a fraction of the total amount of workers’ compensation you will be receiving. The amount of tax levied under this exception is negligible for most workers’ compensation recipients.

Retirement Plans

If you retire due to your injury, any retirement benefits you receive that are based on something other than your injury (age, length of service, etc. ) will be taxed normally — in other words, they will not be included in the workers’ compensation tax exemption. The fact that your injury was what caused you to retire in the first place will not be taken into account.

The Clock is Ticking…

If you are concerned about the tax consequences of a workers’ compensation award, particularly if you receive both workers’ compensation and SSI or SSDI, contact Raleigh workers’ compensation attorney John A. Hedrick by calling 919-626-3895, emailing us at john@johnhedricklaw.com or completing our online contact form. Mr. Hedrick enjoys the benefit of decades of experience, and he is Board Certified in workers’ compensation law.