Workers Compensation Attorney Law Firmprovides experienced, personalized legal representation for injured workers in and around Los Angeles. The attorneys are specialized andunderstand theins and outs of tax implications on your workers’ compensation funds and can provide the best counsel to receive maximum compensation while reducing the taxable portion of the income. These kinds of cases can be highly complex, and it would be a smart move to speak with a well-established lawyer about the intricacies involved with exact calculations related to compensation benefits.
What Are The Workers’ Compensation Benefits under California Law?
Any injury or illness that you get while performing the duties related to your job makes you eligible for workers’ compensation benefits. Worker’s compensation was designed under the law to provide financial compensation and medical benefits to workers who suffer on-the-job injury or illness. All public employers in California are required by the state laws to have a workers’ compensation insurance policy, which pays benefits to employees with work-related injuries and protect them from undue financial hardships.
Under the California workers’ compensation regulations, the employer must provide cash benefits, including lost wages and medical costs,to the employees who sustained occupational injury or sickness. Such compensation benefitscan serve as vital support toa worker who has incurred medical bills but wasn’t able to work or collect a paycheck.
Whether it’s a construction worker getting their leg hurt on the job, or a factory worker injuringhis back while lifting heavy boxes of inventory, the workers’ compensation "no-fault" policy can help the injured workers cover all their medical expenses. The same is the case with illness. For instance, a plumber gets exposed to asbestos while working in a customer’s house and fall sick. They may need time to recoverand help to cover the medical costs of the treatment. A workers’ compensation policy can help cover the associated medical expenses with the worker’s work-related illness. Also, if a driver employee meets with an accident while en route to deliver goods to a customer, they may need some time off work for injury recovery. In such cases, they are also liable to seek workers’ compensation benefits in the form of payments for wages lost during the period of recovery. Workers' compensation also covers other benefits, including ongoing physical therapy for any work-related injury, funeral costs if a worker dies in an unfortunate work-related accident, disability payments in case an employee sustains a permanent injury while at work, and others.
The laws under the workers' compensation act are strict but can be subject to differing state laws. So, one must research their individual state's laws and regulations for considering workers' compensation in tax preparation. Taxesmay enhance or restrict benefit payments of the injured individuals under workers’ compensation regulations as well as can be an essential piece of information to keep in the record while receiving a tax return.
Are Workers’ Compensation Benefits Taxable?
Worker’s compensation is a protection in case of a workplace injury. Many injured individuals rely on workers’ compensation benefits for their livingpost-injury, and it can turn into a real worryif any amount is lost from the compensation amount. That is why injured workers who receiveworkers’ compensation payments or negotiating a workers’ compensation settlementgenerally ask: Are the benefits under workers’ compensation taxable or not?For the most part, theresponse is NO. Whether you receive wage loss payments weekly or in the form of a lump sum settlement, workers’ compensation is not qualified to the taxable.
In California, injured workers receiving benefits from workers’ compensation are not subjected to taxes at the state or federal levels. According to the Internal Revenue Service IRS Publication 907, the benefit payments received in the form of workers’ compensation for a job-related disease or injury are completely exempt from tax if paid under a workers’ compensation act or a similar statute. The injured worker does not need to pay any taxes on their weekly wage loss benefits, on the value of medical costs incurred, or on your workers’ compensation final settlement. The same tax exemption rule applies to the surviving dependents of the deceased worker who are entitled to receive workers’ compensation death benefits.
Workers’ compensation is categorized under non-taxable income just like other governmental benefits, such as incomes from public welfare fundsand compensatory damages for physical injury or illness. The disability benefits received under a no-fault car insurance policy meant to cover for loss of income or earning capacity due to an injury belong to the same non-taxableincome category. Likewise, the compensation you receive due to a work-related permanent partial disability associated with loss of or use of a body part is non-taxable.
The compensation benefits received by the injured workers are not subject to income tax in California because it is funded under the workers’ compensation act or statute. The benefits are not considered “earned income” under current tax laws. Also, when you are injured in work-related activity or any other activity, you will have to miss work, and the benefits received for the lost wages are at a reduced rate from your regular wages.
One of the main reasons why workers’ compensation is exempted from taxation is that the compensation earned comes from the public through federal funds. The fund is designed to help the injured worker for settling their bills during the period of recovery from work-related injury or illness. Taxing such benefit payments would be grossly unfair and unjust, by any means, as it would be like feeding its own money back into the system.
Since the workers’ compensation benefits are exempted from tax, there is usually no need to report them as income on your tax return unless you meet the tax-exempt exceptions that may apply.
When Workers’ Compensation Benefits Become Taxable
A portion of your worker’s compensation benefits may incur a tax responsibility on your part in certain conditions.The loneexception to the tax-exempt rule may apply if youreceive certain other disability benefits through federal programs, such as Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), in addition to receiving workers’ compensation.
Both SSDI and SSI are federal government programs, overseen and managed by the U.S. Social Security Administration (SSA), that assist people with disabilities and meet the established medical criteria.
In order to qualify for SSDI benefits, an individual must demonstrate an inability to work because of a medical condition that is supposedto last for a minimum of one (1) year or result in death. For eligibility, the medical condition of the disabled must meet SSA's definition of disability. SSDI benefits are intended for people who have earned enough Social Security work credits within a specifictime. On the other hand, SSI benefits are for people who have low income. To qualify for SSDI, such individuals either have never worked or who have not received enough work credits. SSI program is strictly based on your financial need, according to income and assets, and has nothing to do with your work history. The SSI program is funded by general fund taxes.
Social Security benefits can be collected concurrently with workers' compensation in a situation if the health condition of an injured taxpayer fails to improve and result in a disability.
Though workers’ compensation benefits are non-taxable insurance settlements, when an injured worker receives other benefits in addition to the workers’ compensation, they may be liable to pay taxes. In certainsituations, the Social Security Administration (SSA) may result in reducing anindividual's Social Security disability insurance or supplemental security incomeso that the aggregate amount of the disability payments and the workers' compensation benefits staysunder a particularthreshold. This threshold value is referred to as the workers' compensation offset.
The amount by which SSA offsets your disability payment (Social Security) benefits is the amount of workers' compensation that is taxable. Generally, workers who receive both disability payments under SSDI, as well as benefits under workers' compensation, don't owe federal taxes as they have enough taxable income.So even if a part of the benefits is regarded as taxable, it is unlikelythat you’ll owe taxes.
Furthermore, it is noteworthy that although workers’ compensation does not come under taxation, it is still considered as your income. Assistance like cash benefits, Medicaid, and SSI are available only to individuals with low income, and it is the workers’ compensation that is to be considered asincome for establishing entitlement for such programs. In cases where a settlement agreement puts an injured worker at the risk of being barred from continuing his or her Medicaid coverage, it is expected to accept a workers’ compensation settlement in a Special Needs Trust. By doing so, the injured worker would be able to continue to get Medicaid benefits while still being able to use the settlement funds for personal care, home, and transport expenses.
Reducing Taxable Income through Workers’ Compensation Settlement
Benefit seekers may get help from an experienced accountant or tax attorney to structure a workers’ compensation settlement in such a way that the workers’ comp offset value is minimized, thus reducing the taxable portion of the income. The right structuring can keep the payable taxes minimal.
It is a common practiceto specify in the workers’ compensation settlement agreement that the lump sum amount should be uniformly dividedthroughout the remaininglifespan. By doing so, in place of receiving small periodic payments, the injured worker will collect a lump sum, but then the lump sum is considered to cover the beneficiary’s expected lifetime based on actuarial tables. One must ensure that the monthly rate is known in your workers’ compensation settlement agreement.
Here is an example to understand it with more clarity. Let’s say a person has an expected lifetime of 510 more months and receives a workers’ compensation lump sum settlement of $15,300. If the settlement agreement states that the lump sum is spread out through the lifetime of the beneficiary, SSA will find that the prorated monthly amount is $30 ($15,300 divided by 510 months).
It is important to note that in some states, the workers’ comp settlement can be spread over the beneficiary’s retirement date, not for the remainder of the beneficiary’s lifespan according to actuarial tables. Whichever is the case, a well-documented settlement agreement can often help you get rid of the liable income tax for worker’s compensation benefits.
When the Offset Is Taxed
It is to be noted that when you are receiving both workers’ compensation and disability benefits from Social Security, the combined sum of these federal benefits must not exceed eighty (80) percent of your average current earnings or your pre-injury income. In such cases, the SSA will reduce the person’s SSDI or SSI benefits until it reaches the 80 percent threshold.
An individual’saverage current earnings can be calculated using one of these three (3) formulae. The average current earnings are usually demarcated as the highest of:
- The use of average monthly wage tocompute your disability benefits, or
- One-sixtieth (1/16th) of the sum of your wages in thefive best-paid years in succession, or
- One-twelfth (1/12th) of the sum of total wages from your best paid year out of the last five years
The SSA uses a formula to calculate your average current earnings that are most favorable based on an individual’s circumstances.
Although, it is the workers’ comp benefits that payout, the government taxes the Social Security benefits income, not the workers’ compensation.
Now the IRS treats the reduced portion of the SSDI amount, or offset amount, as potentially taxable. Here is an example to offer better clarity to the readers.
For instance, an injured worker named Johnson has an average current earnings of $3,000. He is entitled to $2,000 SSDI benefit and receives a workers’ compensation of $750 every month. The total benefits equal to $2750 per month. However, the amount exceeds $2,400, which is 80% of Johnson's average current earning. Therefore, in most states, Johnson's SSDI benefits will be reduced by $350. The final benefit payment received by Johnson would be a total of $2,400, which is a combination of $1650 as SSDI benefits and $750of the workers’ compensation.
Johnson would then have a taxable amount of $1650 SSDI in addition to $350 from the workers’ compensation because the SSDI was reduced by $350. The taxed amount clarifies a point thatJohnson would be taxed for receiving the total amount of $2,000 in Social Security benefits, even though workers’ compensation gave $350 of the final benefit payment.
In case the offset exceeds of the combined benefits, the Social Security benefits may become taxable to a certain level. The amount of the offset may be subject to taxes based on your income level and filing status.
Benefits come under taxable income if you exceed specified base amounts for your tax situation. If you are single,a head of household, a qualifying widow or widower with a dependent child, ora married individual filing separatelyandlivedawayfromyour spouse at any time during the year; the taxation base amount is $25,000. The number is $32,000 for taxpayers who are married and filing jointly and only $0 for married couples filing separately (who lived together at any time during the year) on their taxes.Knowing the base amountis an important piece of information if you are planning to file taxes separately while married.
In such a situation, the Internal Revenue Service will charge tax from you on the full amount of the Social Security benefit, even though workers’ compensation has offset it.
When a “Reverse” Offset Applies
While most states lower the Social Security payments until you reach the allowable 80% threshold, some states have a "reverse offset," which causes your workers' compensation benefits to reduce rather than SSDI benefits. In such cases, the injured worker will not be taxed on any of the workers’ compensation payments. However, a portion of the SSDI benefits will come under taxation if the combined income (SSDI + work compensation benefits) is high enough.
If you want to determine whether you will owe taxes, consider the amount provided to you in a W-2 tax form (Wage and Tax Statement). This particular amount won’t reflecton your benefits under workers’ compensation. However, other benefits that may be considered as income may be reflected in this amount.
Other Tax Scenarios Regarding Workers' Compensation
Based on the California state laws, the workers’ compensation insurance and benefits may or may not be subjected to income tax. Following public benefits may affect your tax obligation on your previously earned workers’ compensation.
- Retirement Benefits
Social Security retirement benefits are considered taxable. The tax exemption does not concernretirement plan benefits that you receive based on your age, contribution to the plan, or length of service in years. The retirement benefits will be considered taxable income even if the employee or workerhas retired because ofon-the-job illness or injury. The retirement benefits are also deemed taxable if the workers' compensation payments lower your railroad retirement or social security benefits.
- Interest Paid on Delayed Benefits
If benefit payments are compensated with interest, which usually happens when the workers’ compensation carrier triggered a substantial delay in processing a claim. Any interest paid on delayed benefits is regarded as taxable income.
- Medical Reimbursements
Medical benefits under workers’ compensation do not come under your income. However, themedical reimbursements, including doctor visits, hospital bills, prescriptions, and physical therapyare withheldfrom the amount calculated for the full medical expense deduction. According to the IRS, the amount of the deduction is limited to that portion of expenses that exceeds 7.5 percent of the injured worker’s adjusted gross income.
- Returning to Work
Mostly injured workers who receive workers’ compensation return to work after recovery and treatment. However, returning to work may also affect the tax liability on your previously earned worker’s compensation. When a person returns to work after getting workers’ compensation, all the additional payments receivedare considered as a taxable income. It also includespayments for performing light duty work.You must report them as wages under your federal tax returns. For instance, a construction site worker sustained a shoulder injury while at work and the doctor restricted him of certain activities, including lifting weights more than fifteen pounds. So, though the injured worker is not able to return to his prior-to-injury job, the employer provided him a different desk job at the office with no lifting labor involved. He or she now earns regular wages while performing light duties at work. In such a case, his or her earnings are considered taxable.
Now consider the same construction worker in a slightly different scenario. In the second case, the injured worker is provided with the light duty work but paid lesser wages as compared to wages prior to the injury. Under this situation, the injured worker may seek workers’ compensation benefits as part of the workers’ compensation temporary partial disability (TPD) benefits. The earnings from light duty work, in this case, are considered taxable income, but not the TPD benefits.
Find a Workers Compensation Attorney Specializing in Tax Implications for Workers’ Compensation Benefits Near Me
Workers’ comp benefits and insurance can be a tricky affair.The experience and expertise of an attorney like Workers Compensation Attorney Law Firm can help you throughout the process of seeking workers’ compensation benefits. If you are eligible for both SSDI and disability benefits through workers’ compensation, our attorneys with their expertise, in-depth knowledge and understanding of the workers’ compensation settlement can help you minimize the offset and reduce the taxable portion of the income. Our skilled legal assistance can help you navigate through the complexities and intricacies of receiving the right compensation and be your point of contact for discussing tax implications. So if you are looking for any assistance regarding tax implications for workers’ compensation benefits, get in touch at 310-956-4277 for a free, no-obligation consultation with our well-seasoned legal experts regarding your workers’ compensation case.