Workers’ compensation benefits are available to employees who sustained a work-related injury or illness, and California companies must have these benefits available. If you received workers’ compensation benefits in California, you might be wondering whether you have to report these benefits on your taxes and if the compensation is taxable. While you should report these benefits, it is typically not taxable.
These benefits are nontaxable because it is a public, federally funded program to help employees cover bills as they recover from a work-related illness or injury. Additionally, the compensation is reimbursement of funds to accident victims of work-related injuries or illnesses. The compensation is not income.
If you are filing a workers’ compensation claim in California, your case may benefit from the assistance of an attorney. At the KCNS Law Group, we can guide you through the claims process and discuss any other tax implications workers’ compensation benefits may have on you.
It is crucial to understand that a few exceptions to the tax-free status of workers’ compensation (WC) benefits may lead to taxation. Specifically, your WC benefits may be taxable if you also receive Social Security benefits, including Social Security disability income (SSDI) or supplemental security income (SSI).
The rule states that combined WC and SSDI income cannot exceed 80% of your pre-injury income. If this happens, Social Security benefits will offset any income above this limit. Whether SSDI or SSI, the income will decrease, and that offset is taxable. You must remember that the government taxes Social Security income, not workers’ compensation, despite the fact that it is the workers’ compensation benefits that payout.
While most people collecting workers’ compensation are not collecting Social Security, they may start if their condition worsens over time. This may lead to them receiving permanent disability benefits, which may lead to taxable income. Other public benefits, such as retirement benefits, may also impact your taxes.
Benefits are also taxable when your income exceeds a certain threshold. For example, earning more than $25,000 as a single tax filer can result in taxable income. The number for married filers is $3,200 and $0 for married couples filing separately.
Furthermore, California Labor Code Section 132a states that workers’ compensation can be taxable if the injury or illness resulted from discrimination. Workers’ compensation may also be taxed when the amount is to cover lost wages.
If you are simultaneously receiving workers’ compensation and Social Security benefits, it will be in your best interest to hire an attorney. Your attorney can structure your settlement in a way that minimizes workers’ compensation offset and any taxes you might have to pay. Additionally, they will also keep your best interests in mind throughout the claims process.
Knowing when your workers’ compensation benefits are taxable is an essential part of your claim. While it may be complex to know on your own, an attorney can help. At the KCNS Law Group, our workers’ compensation attorneys can review your case and determine whether any income is taxable.
At the KCNS Law Group, we dedicate ourselves to helping our clients understand their options and rights after a worker-related injury or illness. To learn more information about how our firm can help you, give us a call at (818) 937-9255 or complete our contact form to schedule a free consultation.