Do I Have to Pay Taxes on Workers’ Compensation?

Workers’ compensation benefits and settlements are fully tax-exempt, which means you do not have to pay taxes. Whether you have received weekly payments or a lump sum, federal law does not allow it.

Do I Have to Pay Taxes on Workers' Compensation?

Tax Obligations

When filing taxes, you do not need to add workers’ comp to your earned income. However, depending on the nature of your workplace injury, you may have received workers’ comp and later returned to regular or light duty. If you worked at any point within the tax year, even part-time, the salary earned from your job is part of your taxable income even if you are still receiving workers’ comp benefits. Additionally, if you took money from a retirement plan or out of a 401k, you will be responsible for taxes on that income.

Will I Receive a W-2?

If you worked at all within the tax year, then you should receive a W-2 that only includes your taxable earned income. Since workers’ compensation is not a taxable form of payment, you should not receive a W2 that includes it. In rare cases, an employer can make a mistake, and you may receive a W2 for the amount. Don’t panic and see if you can get it amended by your employer before filing your taxes.

If you cannot get an amended W2, you may have to fill in the total income amount on your taxes. Doing so will ensure you report all income listed on your W2. The amount you received as workers’ comp benefits will go on line 21 of your 1040 as a negative. When factored into your taxes, you will end up subtracting the workers’ comp you received from your total income.

Social Security and Workers’ Compensation

Injured workers can receive both Social Security Disability benefits and workers’ compensation benefits simultaneously if eligible. However, the Social Security Administration will offset your benefits to ensure you are not earning more than 80% of your previous wages in benefits. In other words, your disability benefits will be reduced. It is important to note that Social Security Disability benefits are considered taxable income.

How Does Workers’ Compensation Impact My Family’s Tax Liability?

To fully understand how your particular situation will change your tax liability, you may want to meet with a certified tax professional. Since workers’ compensation wages are non-taxable income, this can help lower an injured worker and their family’s tax liability. An injured or ill worker who may not have much or any income to report can effectively place themselves and their spouse in a lower tax bracket if filing jointly. As a result, there is less income to report which often means a lower tax return compared to when both spouses work an entire tax year.

A Workers’ Compensation Lawyer Can Help

If you have questions about workers’ compensation and how your tax return can be affected, schedule a free consultation with a Las Vegas workers’ compensation lawyer. They can be a vital resource when it comes to ensuring your compensation is protected. Call (702) 384-1414 or send us a message online today.

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