Benjamin Franklin almost got it right when he said, “…in this world nothing can be said to be certain, except death and taxes.” With a few exceptions, every worker in California is required to pay federal and state income taxes. But what happens when you’re unable to work due to a job-related injury? Are you taxed on the workers’ compensation benefits you receive to cover your missed wages? Not in most cases. However, a portion of your benefits may be subject to tax if you also receive Social Security disability payments.
WHEN ARE WORKERS’ COMPENSATION BENEFITS TAXABLE?
Workers’ compensation benefits are typically considered non-taxable income, putting them in the same category as payments from public welfare, compensatory damages for injury or illness, disability benefits under a “no-fault” car insurance policy, and compensation for permanent disfigurement. In the event of a work-related fatality, death benefits paid to survivors are also tax-exempt.
In California, the Social Security Administration (SSA) will sometimes reduce a worker’s Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) if he or she is also receiving workers’ compensation benefits. This happens so that the combined amount of all payments are no more than 80 percent of a worker’s earnings when he or she was fully employed. This is called workers’ compensation offset. The amount by which Social Security reduces an employee’s disability payments is equal to the amount of workers’ compensation benefits that are subject to tax.
For example, if Social Security reduces your monthly disability check by $400, then $400 of your workers’ compensation benefits is taxable. This being said, most people who collect Social Security disability payments and workers’ compensation benefits don’t make enough taxable income to owe federal taxes. Therefore, even if a portion of your workers’ compensation benefits is considered taxable, it’s unlikely you’ll actually owe taxes to the Internal Revenue Service (IRS).
HOW CAN I MAXIMIZE MY BENEFITS AND REDUCE MY TAXABLE INCOME?
If you receive disability payments from Social Security in addition to your workers’ compensation benefits, it’s in your best interest to involve a lawyer. An attorney can structure a settlement agreement to minimize any offset of your workers’ compensation benefits as well as any taxes you might have to pay.
Typically, an attorney will specify that the lump sum from a workers’ compensation settlement should be spread out over your expected lifetime. For example, if you receive a $20,000 workers’ compensation settlement and are expected to live another 40 years (480 months), Social Security will usually calculate the offset based on $41.66 per month. In this scenario, you would still receive the settlement in one payment, not small periodic checks over the course of 40 years. However, Social Security would calculate any SSDI offset based on this amount. Because you would have a lower monthly income from your workers’ compensation benefits, you would retain more SSDI payments and minimize any tax liability.
ARE YOUR WORKERS’ COMPENSATION BENEFITS TAXABLE?
If you expect to receive Social Security disability payments in addition to your workers’ compensation benefits, contact an attorney as soon as possible. At The Law Office of Matthew Russell, we can draft a settlement that minimizes your workers’ compensation offset so you can receive all of the money you’re entitled to while reducing or even eliminating the taxes you might have to pay.
Call us today at (619) 544-1506 to schedule your free consultation.