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Are Workers’ Comp Benefits Taxable Income in California?

  • Published: November 10, 2021

If your employees get hurt or sick from their job, they can get benefits through workers’ compensation insurance. When your employees receive workers’ compensation benefits, they may wonder if they’ll have to pay taxes on them. It depends on the circumstances.

Taxable income is often referred to as adjusted gross income or adjusted income minus deductions or exemptions. Taxable income is much more than just wages and salaries. It includes bonuses, tips, unearned income, and investment income. Taxable income also includes fringe benefits provided by employers as a part of compensation, income from virtual currency, and services or goods received in barter.

Yours and your family’s future quality of life depend on the amount of worker’s compensation benefits you receive when you have been injured in a work-related accident. Consult an experienced California worker’s comp lawyer to advise you on how you can receive benefits and answer your questions about its taxability.

Is Workers’ Compensation Taxable Income?

Like personal injury claims, benefits received through a state’s workers’ comp program are not subject to either federal or state taxes. They aren’t taxed for various reasons — one being that they’re not considered “earned income” under current tax laws.

According to the IRS Code 26 U.S. Code § 104 , Workers’ Compensation for an occupational injury paid under the Workers’ Compensation Act or similar law is not taxable.

The code generally applies to both structured weekly wage loss and lump-sum payments.

For over 40 years, the experienced legal team at KCNS Law Group LLP has won workers’ compensation benefits for injured workers throughout California. If you are worried that your workers’ compensation benefits may be taxed, consult us today.

Are There Exceptions?

If you return to work in a lesser or light duty role during your recovery, keep in mind that any earnings from your job will be taxable since they are earnings from working. The workers’ comp wage loss benefits you’re still receiving will not be taxed.

While the answer to the question above is straightforward for regular workers’ comp benefits, it gets vague and confusing if your benefits are combined with social security disability (SSDI) or some retirement plan. In short, any supplemental benefits you receive through SSDI, Supplemental Security Income (SSI), or another program will be taxable at the applicable rate.

When an injured worker also receives disability benefits SSDI or SSI, the Social Security Administration may reduce the individual’s SSDI or SSI payouts. They make the reduction so that the combined amount of the workers’ comp benefits and the disability payments remains below a certain threshold. This reduction is known as a “workers’ compensation offset.”

So, if SSA reduces your monthly SSDI check by $200 due to the workers’ compensation offset, then $200 of your workers’ comp will be taxable. Any pension based on your age, years of service, etc., is also taxable. However, if part of that plan is paid through workers’ compensation, that part will not be taxed.

KCNS Law Group LLP has extensive knowledge of Worker’s Compensation and how it affects injured workers in California. We help guide our clients through the worker’s comp claim filing process and explain other legal or tax implications.

What is Workers’ Compensation Offset?

The most basic question is: did the injury occur at work?  Remember, workers’ compensation benefits are usually not taxable benefits at state or federal levels. The exception arises when a person also collects disability benefits through SSDI or SSI AND Worker’s compensation benefits.

In these cases, the Social Security Administration (SSA) may diminish a person’s SSDI or SSI so that the total amount of benefits payments stays below a specified threshold. This reduction is called the workers’ compensation offset.

These cases can be highly complex, and trying to navigate the system alone could be very expensive in the long run. An experienced California worker’s compensation attorney can assist you in determining how and when your worker’s comp payment is taxable.

How the Worker’s Compensation Offset Works

The amount of taxable workers’ compensation is the amount that the Social Security Administration reduces in your disability payments. As an example, if Social Security lowers your monthly SSDI check by $250 due to the workers’ compensation offset, then that $250 of your workers’ comp is taxable.

Suppose you are receiving Social Security Disability and Workers’ compensation benefits. In that case, the combined amount cannot exceed 80% of your average current earnings, defined as the larger of:

One-sixtieth of total wages for your highest-earning five years in a row, or

One-twelfth of wages from your highest-earning year out of the five preceding years.

Most states just lower your Social Security payments until you no longer exceed the 80% threshold. Other states use a “reverse offset,” in which your workers’ comp payments are reduced.

An accomplished California workers’ comp lawyer should be able to structure your workers’ compensation settlement to minimize the offset and reduce taxable income.

Some Income Received While on Workers’ Compensation is Taxable.

While worker’s compensation benefits are generally not taxable, the income you receive related to those benefits could be taxable.

Retirement Benefits received while on Workers’ Compensation. While workers’ comp benefits are not taxable, any retirement benefits you’ve collected based on your age, years of service, or prior contributions, are taxable. Even if you’ve retired due to an illness or injury that gave rise to a workers’ comp claim, this is true.

Returning to Work while receiving Workers’ Comp: Most people receiving workers’ comp do return to work eventually. Some workers perform “light work” while receiving a portion of their workers’ comp benefits. Any wages earned while you’re still receiving workers’ comp benefits are considered taxable income.

Interest payments received as part of workers’ compensation payments: Occasionally, workers’ compensation benefits are paid with interest, often when the insurance company caused a considerable delay or was involved in egregious conduct. Any interest paid is considered taxable income.

Survivors’ Benefits: Workers’ compensation benefits paid to surviving family members after a worker’s death are not considered taxable income.

Talk to an Experienced California Workers’ Compensation Lawyer

Determining the taxable status of your worker’s compensation benefits is a complicated process that takes time, commitment, and a clear understanding of the relevant California laws. KCNS has 40+ years of combined experience successfully handling worker’s compensation and personal injury law cases in Southern California.

Working with an experienced worker’s compensation lawyer will protect your rights and give you the comfort that you are dealing with a trusted advisor.  Contact us at 818-937-9255 for a free consultation.

KCNS Law Group LLP

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