Do I Pay Taxes on Workers’ Comp?
April 4, 2019
With the tax filing deadline quickly approaching, many are wondering whether they must pay taxes on their workers’ comp benefits. The short answer is no – under both federal and Pennsylvania law, workers’ compensation benefits are not taxable.
However, there is one exception to that tax-exempt status when it comes to Social Security Disability Insurance (SSDI). The knowledgeable Philadelphia workers’ compensation lawyers at Larry Pitt & Associates, P.C. can answer all your workers’ comp-related tax questions, including what is considered taxable income.
Workers’ Comp Benefits are Not Taxable
According to IRS Publication 907, workers’ compensation for occupational sickness or injury is not taxable if paid under a workers’ compensation act or similar law. Under the Pennsylvania Workers’ Compensation Act, employees may receive several types of workers’ compensation benefits, including payment for:
- Medical expenses – Workers are entitled to compensation for reasonable medical expenses associated with their work injury, such as the cost of medications, treatments, and surgeries.
- Wage loss – Those who miss more than seven days of work are eligible for disability benefits, the amount of which will depend on the worker’s pre-injury wages and the severity of the injury.
- Vocational rehabilitation – Assistance with finding another job may be available for workers who are unable to return to the jobs they had before they suffered their injury.
- Specific loss – Certain severe injuries such as amputations and facial disfigurement may qualify a worker for additional specific loss benefits.
- Death – If a worker dies due to their work injury, that worker’s dependents may receive death benefits, including compensation for up to $3,000 in funeral expenses.
Social Security Disability Insurance (SSDI) Exception
Workers who are receiving both workers’ compensation and SSDI benefits may have to pay taxes on a portion of their workers’ compensation benefits to offset the amount received through SSDI. This “workers’ compensation offset” is because the combined amount of workers’ comp and SSDI may not exceed 80 percent of a worker’s average weekly earnings.
A worker’s average earnings are determined by which of the following is the highest of:
- The average monthly wage used to calculate the SSDI benefit amount
- An average of the worker’s earnings from his or her highest five years in a row
- The average monthly earnings from either the year before the disability occurred or any of the five previous years
If the total of a worker’s SSDI benefits and workers’ comp benefits exceeds 80 percent of their average weekly wages, the worker’s SSDI benefits will be reduced until it is under the limit.
Lump Sum Workers’ Compensation Settlements
Workers’ compensation benefits, including compensation for medical expenses, wage loss, vocational rehabilitation, specific loss, and death are not considered taxable income. Lump sum settlements are also tax exempt but may still be subject to the SSDI exception. However, an experienced attorney can help workers draft settlement agreements in a way that minimizes workers’ compensation offset.
Philadelphia Workers’ Compensation Attorneys at Larry Pitt & Associates, P.C. Help Workers With Tax Issues
If you have any questions regarding the best way to proceed with your work injury claim, contact a Philadelphia workers’ compensation attorney at Larry Pitt & Associates, P.C. We have over 35 years of experience assisting workers in Philadelphia and throughout Pennsylvania. For a free consultation, please complete our online contact form or call us at 888-PITT-LAW.
Located in Philadelphia, we represent clients in and around Pennsylvania, including those in Abington, Ambler, Ardmore, Bala Cynwyd, Bensalem, Clifton Heights, Crum Lynne, Darby, Downingtown, Doylestown, Drexel Hill, Essington, Folcroft, Glenolden, Haverford, Havertown, Holmes, Kutztown, Lansdowne, Media, Merion Station, Morton, Narberth, Norristown, Norwood, Philadelphia, Prospect Park, Quakertown, Reading, Roxborough, Sharon Hill, Upper Darby, West Chester, and Wynnewood.