Workers’ compensation is an insurance benefit available for employees who suffer work-related injuries or illnesses. The amount offered as compensation depends on multiple factors, including the extent and severity of the injury, treatment received, company regulations, state laws, and more. Whether it is paid by the employer or their insurance provider, this amount is subject to predetermined limitations and has strict criteria for qualification. Employees can expect this coverage to include their medical expenses, loss of income, and other incidental costs stemming from the workplace accident. If you or your loved one suffered an injury or illness during work, you might be wondering about your legal options for filing a claim. Taxation is one of the biggest questions employees have related to this compensation. However, the answer to whether you would have to pay taxes on workers’ compensation is not straightforward and depends on several factors.
State of Residence
Depending on the state you live in, your compensation may or may not be taxable. Some states might tax on workers’ compensation amount in part or whole, while others might not. It is important to familiarize yourself with state regulations or enlist the help of a skilled lawyer to know whether your compensation is taxable. You don’t want to make any assumptions when dealing with your workers’ compensation. Make sure to look up your specific state’s rules so you’re not surprised when tax season comes up.
Disability and Retirement Benefits
In most cases, the compensation is not federally taxable. However, the exceptions to this rule include workers who receive disability benefits and retirement benefits. Concurrently receiving these benefits requires recipients to pay taxes. As the total sum received must not exceed eighty percent of your average pre-disability income. Keep tabs on that when you are receiving your compensation. You don’t want to lose money, especially when you can’t work for certain periods.
Lump Sum Vs Periodic Payments
If an employee receives their compensation as periodic checks (weekly or monthly), the payments are not liable to taxation. On the contrary, those who receive a lump sum as a settlement are subject to different rules. In such cases, the amount received as compensation for medical expenses is not subject to taxes but that for loss of income and emotional pain and suffering is. If you don’t know what you are receiving compensation for, make sure to look that up before it hits your account. Keeping track of what you might owe back on taxes can save you from unnecessary stress.
Prior Declaration
If you deduct your medical expenses from your total taxable income in a prior year and receive workers’ compensation in a new year, you will be required to include part of this compensation in your declared taxable income. It is based on the rule that no one can claim benefits for the same expenses twice. These details can be tedious to keep up with, but they can save you from getting in trouble. You don’t want to deduct anything from your taxes that you owe. Make sure you follow all the rules when you are receiving compensation.
Importance of Legal Advice
Determining the taxable amount in your compensation can be a challenging task to undertake on your own. It is important to consult an experienced lawyer who can help you navigate the complicated state and federal laws related to the taxation of benefits. Especially if you receive any supplemental benefits (retirement or disability). These types of benefits have strict rules in place that you are required to follow. If you do something you weren’t aware of was not allowed, you run the risk of losing your benefits. Your lawyer will guide you through the process and provide personalized advice according to your circumstances.
The taxability of the amount you receive as compensation for a work-related injury or illness depends on multiple factors unique to each case. It is important to consult a competent attorney who can help you determine the tax implications of your settlement amount and make an informed decision related to your tax returns. They will go through with you what you owe and what you are legally allowed to deduct from your taxes. It’s in your best interest to reach out to a trusted legal team in your area if you are confused. You don’t want to miss future benefits because you had a lack of information.
