Is Workers’ Comp Taxable?

are workers compensation settlements taxable

If you suffer on-the-job injuries, workers’ compensation benefits can be extremely helpful, even necessary, for you. The benefits that you receive from workers’ comp insurance can help cover things like medical expenses, lost wages, and ongoing care costs. However, each workers’ compensation settlement is unique depending on the case at hand. There are certain factors relating to your job, location, and injury that determine the amount of compensation you are able to receive under this claim. 

Regardless of the amount, people often have several questions about their workers’ compensation benefits and/or settlement. Many people ask the question: Is workers’ comp taxable? Our Louisiana workers’ comp attorneys at Gordon & Gordon Law Firm will answer whether injured employees must pay taxes on workers’ comp and more below. 

How are Workers’ Compensation Payments Taxed?

Say you have a valid workers’ comp case and attorneys Gordon & Gordon help you receive a large payout for your work-related injury or illness. After your case settles, you’re still left with a few questions. One of these is likely “Is workers’ comp taxable?”

The answer is, for the most part, no. Under the Workers’ Compensation Act, workers’ comp, also known as workmans’ comp, is generally not considered taxable at either the state or federal level. Workers’ comp falls under the category of non-taxable income. 

Types of Non-Taxable Income

For reference, other forms of non-taxable income include:

  • Compensatory (though not punitive) damages for personal injury or illness cases;
  • Compensation for permanent loss or loss of use of a body part or function;
  • Compensation for permanent disfigurement;
  • Payments from public welfare fund;
  • Disability benefits under a “no fault” car insurance policy for loss of income or earning capacity as a result of injuries.

For purposes of federal income tax, workmans’ comp awarded to an employee under the Workers’ Compensation Act due to work-related injury or occupational sickness are fully exempt. The same circumstances apply to survivors of an employee wrongfully killed on the job.

how are workers comp payments taxed?

Exceptions to Tax-Exempt Status

There are a few workers’ comp exemptions where someone might have to pay taxes on workers’ compensation. For example, this may occur if an individual also receives disability benefits through Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). There are also cases where the Social Security Administration might reduce someone’s Social Security Disability or Supplemental Security Income in order for the combined amount of workers’ comp and disability payments to remain below a certain threshold. The threshold prevents the amount from exceeding more than 80 percent of your previous earnings. This is commonly referred to as the workers’ compensation offset. 

In these cases, Social Security payments would be reduced and the difference created by the workers’ compensation payments could become taxable. However, in many cases, this amount is small enough to be negligible for taxation purposes. 

Social Security will be based on the offset on the average of what you currently earn. This is typically the highest of the average wage per month of which your disability benefits get based off of. They will also take into account the average wage per month during your five best-paid years and the average earnings of your highest-paid year of the last five.

Will I Get a 1099 for Workers’ Compensation?

1099 is a form that reports income of at least $600 to the Internal Revenue Service, or IRS, from various sources. This can include anything from self-employment earnings to interest and dividends to government payments. The IRS refers to the 1099 as “information returns” that tell them of any other types of income a person has received other than their regular salary. 

The IRS uses a 1099 for tax purposes. Since you don’t need to pay taxes on workers’ compensation benefits (for the most part), you will not get a 1099 for workers’ comp payments. Likewise, you also don’t need to include your workers’ comp benefits on your tax return. 

If your employer did issue you a 1099, call a Shreveport, Bossier City, or Mansfield workers’ comp attorney at Gordon & Gordon to help sort out this issue as soon as possible. 

will i get a 1099 for workers compensation

How is Workers’ Comp Reported to the IRS?

Because workers’ comp benefits are exempt from state and federal taxes, you do not need to report them to the IRS. However, if you do return to work following a workers’ compensation claim to perform light, modified duties, the earnings you receive then will be taxable. You should report these payments as wages on Line 7 of Form 1040A or Line 1 of Form 1040EZ

If your disability pension provides benefits to employees only with service-related disabilities, part of that may be workers’ comp. This means that the part that falls under workers’ comp will also be exempt from taxes. The remainder of your pension will still be taxable as annuity income or pension.

Is Workers’ Compensation Counted as Income?

While workers’ comp benefits are not eligible for taxation, they are still a form of income. Cash assistance, SSI, Medicaid, and other benefits are only granted to individuals with a low enough income. For the purpose of determining eligibility for these kinds of programs and benefits, workers’ comp will count as income. 

If you are currently on Medicaid and fear that a workers’ comp settlement would put you at risk for disqualification from this coverage, you may have another option. Consider putting your settlement from workers’ compensation in a Special Needs Trust. Doing so would allow a disabled individual to continue on Medicaid while still using the settlement funds for home, vehicle, and personal care expenses. 

Contact Experienced Shreveport Workers’ Compensation Lawyers Gordon & Gordon Today

It is important that when filing a workers’ compensation claim, you have a knowledgeable attorney on your side to make sure everything is in order. Your attorney can help structure your workers’ comp settlement in a way that minimizes the offset and allows you to keep any other workers’ comp benefits you may already have. This, in turn, will also help minimize any taxes that you must pay, if any at all. 

The workers’ compensation system can be complex, especially when it comes to taxes and when they are or are not applicable. Attempting to navigate the legal system alone can end up costing you more in the long run. If you have any more questions like “are workers’ comp benefits taxable?” or if you need representation for your workers’ comp case, contact the Shreveport personal injury attorneys at Gordon & Gordon today. Get them working on your case as soon as possible to ensure you receive the best possible settlement. To get in touch with our skilled Northwest Louisiana attorneys, call 318-716-HELP or fill out our online intake form here.