You’re probably used to having your income taxed, so when you get a check for workers’ compensation, you may wonder if your benefits have been taxed, or if you’ll have a tax bill due at the end of the year. These are great questions to ask because it can help you prepare for the future and better understand your rights as an injured worker. Below, we explain how workers’ compensation and taxes are related.
Will My Work Comp Award Be Taxed?
In the majority of cases, workers’ compensation benefits are not taxed under either federal or state law. You may want to double check with your lawyer, but most claim awards will not be subject to taxes.
However, you may notice a change in payments if you are collecting both workers’ compensation benefits and Social Security benefits. If you are collecting both, you may notice that your Social Security benefits have been reduced or offset to account for your additional means of income.
How Is This Offset Calculated?
Even if you are receiving both workers’ compensation benefits and Social Security, there’s a chance that you won’t notice a change in your Social Security benefits. A reduction in Social Security benefits only occurs if your combined benefits through both sources are more than 80 percent of your average regular earnings. So for example, if you earned an average of $2,500 a month prior to your work injury, your combined benefits couldn’t exceed $2,000 a month. If it does exceed 80 percent, than your Social Security benefits will be reduced.
The reason why this offset occurs is because unlike workers’ compensation benefits, Social Security benefits are taxable income. Here’s another example to help clear up how taxes are applied. Using the figures above of $2,500 a month in income, let’s say you were entitled to $1,200 a month in workers’ compensation benefits and $1,000 in Social Security disability benefits. However, since that $2,200 is over 80% of your monthly income, your Social Security benefits would be reduced $200 to $800 total a month. That $800 you receive from Social Security will be subject to tax. The offset $200 will also be subject to tax. Federal law treats any offset amount as though you received it through Social Security, even though it was paid through workers’ compensation. It’s also worth noting that your Social Security benefits will not be taxed if your income is less than $25,000 or you have a married combined income of less than $32,000.
If you are still confused as to if your workers’ compensation benefits or Social Security benefits may be taxed, reach out to Dean Margolis. Aside from helping you win your claim, he can help you understand your tax liability so there are no surprises down the road. For more information about anything workers’ compensation related in Minnesota, reach out to the Margolis Law Firm today.