Is Workers’ Compensation Settlement Taxable?

is a type of insurance that offers benefits such as financial assistance to employees who experience occupational injuries or illnesses. This system was created to protect both employees and employers and helps injured or ill workers cover costs associated with medical bills, rehabilitation, lost wages, and other related expenses.As outlineunder d in Publication 907, “Workers’ compensation for an occupational sickness or injury if paid a workers’ compensation act or similar law” is not taxable. As such, benefits awarded under any workers’ compensation law are tax-exempt at both the federal and state levels. Workers’ compensation benefits are most commonly paid out over an extended period, but they can also be granted as a lump-sum settlement under some circumstances. The Internal Revenue Service (IRS) generally considers all workers’ compensation benefits, including lump-sum settlements, as non-taxable income.

Why Are Workers’ Compensation Settlements Usually Tax-Exempt?

Because these insurance settlements are non-taxable and only represent two-thirds of the worker’s average weekly wage times the percentage of their disability, workers’ compensation benefits are exempt from taxes under the law.

Moreover, the purpose of workers’ compensation laws is to compensate injured employees and cover their medical expenses. These laws and the IRS tax code recognize that occupational injuries necessitate more than just medical benefits. As a result, taxes are not deducted from injured workers’ wage benefits because it is advantageous for workers and their families who need money to cover their bills and living expenses.

What Is a Lump-Sum Workers’ Compensation Settlement?

A lump-sum workers’ compensation settlement is an upfront payment of all benefits due to a worker who has suffered an occupational injury or illness. A lump-sum settlement is typically approved when the worker’s circumstances have changed, such as if they have recovered from an illness or injury and are in a better financial situation than when they first applied for benefits.

A worker must have reached maximum medical improvement (MMI) before receiving a lump sum. This happens when a medical professional determines that the injury or illness will not likely improve any further. The worker might be eligible for a lump-sum payment if they reach MMI and their circumstances change.

Can You Negotiate for a Lump Sum Workers’ Comp Settlement?

One benefit of getting a lump sum is that the worker will get more money than they would have if they had continued to get benefits over a prolonged period of time. Additionally, they will be exempt from the administrative regulations that control when and how benefits are paid. The injured worker must, however, give up their claim to future benefits. Additionally, they might be subject to higher taxes because a larger payment will be reflected on their income tax return.

The bargaining process for a lump sum settlement in a workers’ compensation judgment usually results in a determination of the employee’s entitlement to permanent disability payments and medical benefits. This is in contrast to a lump sum payment, such as would be awarded in a personal injury claim for medical expenses, lost wages, etc. The negotiation is often centered more on what the insurer is prepared to pay to close the case than what it is actually worth in dollars to the worker. This can give the claims adjuster a clear advantage because going to trial will not automatically lead to a higher cash value.

For instance, a worker might negotiate with the insurer for a lump sum settlement, but they may offer less than the worker contends their claim is worth because they are aware that a trial would not yield a lump sum cash award. The employee may have to choose between accepting the insurer’s lower offer and risking a trial that may yield only medical benefits and disability payments.

When Are Workers’ Compensation Monthly Benefits Taxed?

While workers’ compensation benefits are generally considered non-taxable income, there is an exception. Most workers receiving these benefits do not apply for social security. However, if their injury or illness worsens, they may receive permanent disability benefits or other public disability benefits. A portion of those benefits may be taxable if they receive Supplemental Security Income (SSI) or Social Security Disability Income (SSDI) from the Social Security Administration (SSA) in addition to workers’ compensation.

According to the SSA, the amount of any reduction in SSI or SSDI benefits caused by workers’ compensation benefits is taxable. If the combined income received is greater than 80 percent of pre-injury or illness earnings or disability income, SSI/SSDI benefits will offset any income above this limit. Of note, this offset does not affect SSA retirement benefits.

For example, if your workers’ compensation is $1,500 and your SSI/SSDI benefits are also $1,500 per month, your total would be $3,000. If your earnings prior to your illness or injuries were $3,500, the combined benefits would be about 86% of your previous income. This exceeds the allowed 80%, the equivalent of which would be $2800. Your SSDI benefits would be reduced by $200, and this amount is taxable.

The SSA also states that if you receive a lump-sum disability payment from workers’ compensation instead of or alongside a monthly benefit, the amount of SSA benefits you receive may be impacted.

What About the Federal Limit for Taxable Income?

The majority of people who receive SSI/SSDI and workers’ compensation benefits do not earn enough money to be subject to federal taxation. This means that it is unlikely that you will owe any taxes, even if a portion of your benefits are taxable. Even if you are among a minority of employees whose workers’ compensation benefits are partially considered taxable income, a lawyer can work to help you lower or even eliminate the tax liability on your benefits.

Consult With KJT Law Group Today

To learn more about workers’ compensation and tax-exemption laws and how they may apply to you or your family, our legal professionals at KJT Law Group in Los Angeles can help. We can assist you with filing a claim, determining if you might qualify for a lump-sum settlement and other workers’ compensation-related legal issues. Contact us at (818) 507-8525 to schedule a free, no-obligation case review today.