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Many individuals in Connecticut rely on workers’ compensation benefits. When someone sustains a work-related injury and is unable to perform his or her job, workers’ compensation is available to help. It is an essential means of financial support.
Workers’ compensation payments enable injured employees to receive wages while recuperating from injuries. There is a significant concern for people receiving workers’ comp benefits, but does the Internal Revenue Service (IRS) consider workers’ compensation benefits taxable?
Having to pay taxes on workers’ compensation benefits could add even more stress to an already difficult situation. Thankfully, in general, the IRS considers workers’ compensation benefits as tax-exempt. But beware, workers’ comp benefits may offset or be offset by additional benefits that claimants receive. Let’s explain in further detail on this page.
If you have concerns about your work comp and tax return, get a fast reply from “The Fast Firm” of Gould Injury Law. Our workers’ compensation team will have the answers to your questions.
What Is Workers’ Compensation and Who Qualifies?
Workers’ compensation is a program by which employees can receive cash benefits and medical care due to work-related injury or illness. Compensation may be paid out in a lump sum or over time. The injured worker does not have to pay taxes on workers’ compensation benefits which can be used for medical treatment, lost wages, and future medical expenses.
When an employee gets injured or sick because of work, he or she may be entitled to a workers’ comp settlement. These funds can help cover his or her medical bills. They can also provide a portion of his or her average earnings during the time he or she is unable to work.
The amount of the workers’ comp settlement depends on several factors. These include the severity of the injury or illness and the average monthly wage of the employee.
A key workers’ compensation benefit is that it is not taxable. Employees who receive disability benefits from workers’ compensation do not have to pay state or federal taxes on these benefits. Yet, keep in mind that other types of income, such as taxable wages and SSDI benefits, may be subject to taxes.
Workers’ comp benefits can provide much-needed financial assistance to employees who are unable to work due to a physical injury or illness. The benefits can help cover medical expenses, lost wages, and future medical expenses. In some cases, the workers’ compensation settlement may be based on the employee’s average earnings.
Workers’ comp helps protect injured workers from financial harm in case of an accident and injury on the job. By providing an injured worker with benefits that are not considered taxable income, workers’ comp can provide valuable support to the employee.
Does Taxation Apply to My Workers’ Compensation Benefits?
Is workers’ comp taxable? In general, neither federal nor state taxes apply to workers’ comp benefits. They are typically tax-free, even if paid out as a lump sum. If you are receiving workers’ compensation benefits, these are not counted as part of your usual salary.
Most states require that companies maintain workers’ compensation insurance for their workforce. This is required under the Connecticut Workers’ Compensation Act. If a worker becomes ill or injured while working, workers’ compensation can provide benefits for faster relief.
Keep in mind that the accident or illness must be tied to his or her employment. For example, workers’ comp benefits do not apply to an employee who gets into a car accident on the way to work. An insurance company may primarily be involved in this type of case.
Workers’ compensation normally covers:
- Lost wages
- Disability benefits
- Medical treatment
- Ongoing care
- Funeral expenses
Can My Taxes Be Affected by Receiving Benefits Besides Workers’ Comp?
Although workers’ comp benefits are not subject to federal or state taxes, there may be income or tax implications. Be aware of this if you also receive other benefits such as disability benefits and unemployment. Workers’ comp may offset or be offset by other benefits that claimants receive.
These income limitations and tax implications arise when also receiving the following:
- Medical expenditures
- Supplemental Security Income (SSI)
- Social Security Disability Insurance (SSDI)
- State disability
- Retirement
- State and municipal disability retirement benefits
- Unemployment benefits
- Public assistance
Let us examine a few of the above-mentioned situations and how they can affect a workers’ comp claim.
Can receiving compensation for medical costs impact what I pay in taxes?
In general, you do not have to pay taxes for medical services. However, in the following scenarios, medical reimbursements may have an impact on how you pay taxes:
- Advance reimbursements for anticipated future medical costs are considered income
- You should also count any unclaimed reimbursements that were given to you in cash or other benefits as income
Can I receive SSDI and SSI benefits and workers’ compensation at the same time?
Federal disability benefits are accessible to individuals with qualifying disabilities who are incapable of working for 12 months or more.
Social Security Disability Insurance (SSDI) offers Social Security benefits to disabled employees who have paid adequate Social Security payroll taxes to qualify. Additionally, to receive Social Security benefits, you must have limited income.
It should be noted that Social Security Disability benefits may be subject to taxation under the same income rules that apply to Social Security retirement benefits.
Supplemental Security Income (SSI) distributes monthly payments. These payments go to eligible adults and children. However, SSI benefits are not taxable.
There is a key point to keep in mind when determining eligibility for workers’ comp payments. It relates to whether workers’ compensation offset applies to Supplemental Security Income (SSI) benefits when an individual receives both workers’ compensation and SSI benefits.
The total amount of SSDI benefits or SSI benefits, along with workers’ comp benefits, should not surpass 80 percent of an individual’s average income before becoming disabled. If the combined workers’ compensation benefits with SSI payments or SSDI benefits exceed this threshold, the SSDI payment or SSI benefits can be “offset” to meet the 80 percent threshold.
Can I collect unemployment or retirement benefits at the same time as workers’ comp?
If you choose to leave your employment due to your disability, speak with the administrator of your retirement plan. He or she can help you understand the tax repercussions of workers’ comp payments. You may be required to pay taxes on your retirement income.
You can qualify for unemployment benefits if a work-related disability prevents you from doing your job. Still, it is important to remember that receiving unemployment applies only if you are unemployed. Typically, unemployment benefits are taxable.
Act Fast – Consult a Workers’ Compensation Lawyer
Even though workers’ comp benefits are not taxable, you may need to access additional benefits. This can help while you are recovering from a serious injury or occupational sickness.
Collecting workers’ compensation benefits should not increase your tax liability. Still, you may want to have a fast-working workers’ compensation lawyer verify the data on your tax return. It is best to ensure that your reported income is correct after receiving benefits.
You should always seek advice from a qualified Connecticut workers’ compensation lawyer. He or she can help you determine what is taxable income.
If you need legal assistance in a matter related to workers’ compensation, please speak with us at Gould Injury Law. Contact our law office, “The Fast Firm” at 888-WIN-FAST. Or fill out the online form and schedule your free consultation today!