How are Taxes Impacted by Workers Compensation?

Workers Compensation Taxes

As the 2017 tax season rolls around, points out a fact that many business owners might not realize: there are scenarios in which Workers Compensation is subject to federal and state taxes.

The website notes that although Workers Compensation payments are tax exempt in most cases, there are instances when this will not be the case. As the nature of Workers Compensation is to replace lost income, most workers will not run into this problem. However, a tax issue may arise when workers are collecting other forms of income alongside Workers Compensation, such as Social Security Disability Insurance (SSDI) payments.

On their website DisabilitySecrets, Nolo confirms this as a possible issue for anyone collecting both Workers Compensation and SSDI or Supplemental Security Income (SSI). Nolo notes that in most cases, the Social Security Administration (SSA) will reduce the SSDI or SSI payments to below a certain threshold if someone is receiving both forms of supplementary income. This is known as an offset.

On its website, the SSA states, “The intent of the offset provision is to ensure that the combined benefits from workers’ compensation and Social Security are not excessive.” So when does that excess become taxable? Nolo provides an example to illustrate how this might occur:

“John’s average current earnings are $2,500. He is eligible for a monthly SSDI benefit of $1,500 and monthly workers’ comp of $800, for a total of $2,300 per month. Because that amount exceeds $2,000 (80% of his average current earnings), in most states John’s SSDI will be reduced by $300. So John will receive $1,200 from SSDI and $800 from workers’ comp, for a total of $2,000.

John would be taxed on the $1,200 SSDI amount and $300 of the workers’ comp benefit, because the SSDI was reduced by $300. John is treated for tax purposes as having received the full $1,500 in SSDI benefits, even though $300 of that amount was paid by workers’ comp.”

Employers should note that this is an employeeside issue. Employers providing Workers Compensation to their employees are not held responsible should an employee receive an excess of income due to multiple streams of supplementary income. Nevertheless, it could lead to a premium increase for the employer.

While this is a rare situation, employees out for a longer term should keep in mind that it can become an issue over time. Monmouth University professor and CPA Doug Shives notes that employees need to recognize that Workers Compensation is not a government benefit. “It is important people understand it is not a government benefit, it is government-mandated benefit,” said Shives. As such, it’s in the employee’s best interest to keep a close watch on multiple steams of supplementary income.

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