It’s tax season, and if you received workers’ comp benefits last year, you may be wondering if that money is taxable.
In most cases, it’s not. Workers’ compensation benefits aren’t usually taxable at the federal or state level. The same holds true for workers’ comp settlements. That’s because the benefits are considered “compensation for injuries or sickness,” per U.S. code 26 U.S.C. § 104.
However, if you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), you may be responsible for a portion of taxes on your workers’ comp income.
Why Social Security benefits could affect your tax payments
SSDI is a benefit from the Social Security Administration for individuals with a disability and a qualifying work history. SSI is for individuals who are older or disabled, have a very limited income and may not have a qualifying work history.
If an individual receives workers’ comp benefits and SSDI or SSI, the Social Security Administration sometimes has to apply the workers’ compensation offset. This occurs when the combined monthly Social Security payment and the workers’ comp payment exceeds 80% of the individual’s “average current earnings” before the disability occurred. The Social Security Administration ensures the total remains below that level by holding back a portion of the government benefit.
The difference, or what’s held back, is considered taxable. Essentially, the individual pays taxes on the full amount of Social Security he or she would have received, even if a portion of that is actually funded by the untaxed workers’ comp money.
A workers’ compensation lawyer can help structure your settlement efficiently
The resulting taxable income is usually very low, and affected individuals are sometimes even below the threshold of taxable earnings. However, a Georgia workers’ comp attorney can help structure the workers’ comp payments in a way that reduces tax liability as much as possible.
In some cases, an attorney may negotiate for a lump-sum settlement but have the settlement treated as a monthly benefit for Social Security purposes. Using actuarial tables, it’s then possible to guess how many years (and, by extension, months) the individual would be expected to live, allowing the Social Security Administration to calculate any possible offset.
When you’re an injured worker, it’s important to protect your disability benefits and maximize your workers’ compensation as much as possible. That’s why you’ll want to speak to a Georgia workers’ comp attorney right from the start. Every state has different laws regarding workers’ compensation and the workers’ comp offset, so it’s critical that you speak with a specialist.
Georgia Workers’ Compensation Attorneys