One of the most frequently asked questions we get from injured workers is: are my workers compensation benefits taxable?
In general, the answer is no. We will discuss what this means for wage loss benefits, medical benefits, settlements, and Social Security.
Wage Loss Benefits
Wage loss benefits are not taxable for workers who are out of work, have returned to work on light duty, and who have received permanent partial disability benefits. You do not pay taxes on wage loss benefits from workers compensation. Let’s look at the examples below that illustrate this:
Out of Work
If you are not working and you are getting a weekly wage loss check from workers compensation, you will not pay taxes on that money as it is not considered income.
However, it is important to distinguish between weekly wage loss benefits from workers compensation and your earnings from your job. Let’s go through two scenarios involving an injured worker who has light duty restrictions from their doctor and have returned to work:
Worker A has light duty restrictions and the employer is able to provide the worker a light duty job earning their normal, pre-injury wages. Here, Worker A is paid only their earnings from working and does not receive any additional wage loss benefits from workers compensation. Worker A’s earnings are taxable because they are from working at their job, not wage loss benefits from workers compensation.
Worker B has light duty restrictions and the employer is able to provide the worker a light duty job, but the employer is paying Worker B less money than they earned before the injury. In this case, Worker B would be eligible to receive temporary partial disability (TPD) benefits from workers’ compensation. TPD makes up, in part, the difference between what Worker B earned before the injury and what Worker B is earning on light duty. The TPD payment from workers’ compensation is not taxable, but the earnings from working at their job are taxable.
Basically, if the check is coming from your employer, it is taxable and if the check is coming from the workers compensation insurance carrier, it is not taxable.
Permanent Partial Disability Benefits
Some injured workers suffer a permanent loss of use of a body part due to a work injury and can qualify for permanent partial disability benefits. Permanent partial disability benefits due to a loss of use of a body part, hearing loss, or vision loss, are not taxable and not considered income.
Injured workers that have a compensable injury will get a lifetime medical award from the Virginia Workers Compensation Commission. Injured workers that receive medical care through workers compensation do not pay taxes on the value of that medical treatment.
Money received from a lump sum settlement of your workers compensation case is not considered income and is therefore not taxable. However, there are certain instances where settlement money can become taxable. You should consult with our experienced attorneys before settling your workers compensation case to help you negotiate a fair settlement and address any tax concerns.
In many instances, the workers compensation insurance carrier will require an injured worker to sign a release and resignation from their job. If this document is not worded properly, then the entire settlement proceeds could be seen as “consideration” for the release and resignation, possibly making your settlement money taxable. It is important to consult with a workers compensation attorney before settling your case to make sure this does not happen to you.
Social Security Disability Insurance
Some injured workers receive both workers compensation wage loss benefits and Social Security Disability Insurance (SSDI). SSDI is administered by the Social Security Administration (SSA). Although the general rule is that workers compensation benefits are not taxable in Virginia, your workers compensation benefits are taxable if you receive SSDI.
Depending on the amount of SSDI benefits and workers compensation wage loss benefits you receive, the SSA reduces your SSDI payments to ensure that your combined SSDI and workers compensation payments do not exceed 80% of your average earnings.
The amount of money that the SSA reduces your SSDI payment by in that instance is considered an offset, and that offset is considered taxable income. In essence, your workers compensation check is now considered part of your SSDI benefits so it is now taxable.
If you are receiving SSDI, you will want to talk with our experienced workers compensation attorneys to see if you can reduce or minimize that taxable offset. When you settle your workers compensation case, our attorneys can structure the settlement language to maximize the amount of money you receive from a settlement and minimize the SSA’s tax consequences.
Call Injured Workers Law Firm Today
Dealing with a work injury is a stressful event. Contact Injured Workers Law Firm today to learn your rights and discuss any workers compensation tax questions you may have.
About the Author: Michele Lewane
The Injured Workers Law Firm is a Richmond, Virginia based firm solely focused on serving clients with workers' compensation claims in Virginia. If you have questions about your benefits or if you would like more information on the Virginia workers’ compensation system, order our book, “The Ultimate Guide to Workers’ Compensation in Virginia” , or call our office today (804) 755-7755.