Is Workers’ Compensation Taxable?

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About New York Workers' Compensation

Virtually all workers in the state of New York are covered by New York’s Workers’ Compensation statute (WCL § 1, et seq). Coverage under the statute is not optional—if you are an employee, you are covered, with only a very limited number of exceptions.

One major category of employers not covered by the state’s workers’ compensation statute is railroad workers, and this is because they are covered by the Federal Employers Liability Act (FELA). However, if your workplace is covered by the state’s workers’ compensation statute, your employer must carry workers’ compensation insurance that will cover you if you suffer a work-related injury or illness.

The benefits available to you through a New York workers’ compensation claim include:

  • Payment for necessary medical care and treatment;  
  • Temporary Total Disability payments, in the amount of two-thirds of your average weekly wage, while you are unable to work;
  • Partial Temporary Disability payments while you are on light duty and earning less money
  • Permanent Partial Disability Benefits if, as a result of your work-related injury or illness, you have permanently lost the use of a body part or suffered the loss of an organ or bodily function, or been disfigured
  • Compensation for Permanent Total Disability if you are left totally disabled
  • Vocational rehabilitation to assist you with finding a new vocation if you are unable to return to your previous line of work
  • Death Benefits to be received by your surviving spouse, children, and other dependents if you were to lose your life due to a work-related injury or illness.

No-Fault System

Worker’s compensation is a no-fault system. This means that, as far as your worker’s compensation claim is concerned, it does not matter if you or your employer was to blame for your injury or illness.

 

You will be eligible to receive workers’ compensation benefits, as long as you suffered an injury or illness arising out of and in the course of your employment, such as:

 

  • A sprain or strain. This type of injury could mean twisting your ankle while going up the stairs, straining your back from overextending yourself, or a knee ligament strain from the improper lifting of a heavy object.
  • A slip and fall accident. These are often caused by wet floors, loose carpet tiles, a slick or icy parking lot or main entranceway, and other common oversights.
  • A falling object. In some work environments, such as on construction sites and in warehouses, the threat of being struck by a falling or wayward object is an ever-present danger.

 

  • A driving accident. Speeding tailgating, distracted driving, and other aggressive driving habits put those who drive during the course of their employment at risk of being injured in an accident.

Is Workers’ Compensation Tax Deductible?

Regardless of whether you’re receiving workers’ compensation benefits for a few weeks or several months, you might want to know whether or not you need to pay taxes on those benefits. The easy answer to this question is no.

One of the only exceptions to this rule comes up whenever you receive public disability benefits, such as Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) in addition to workers’ compensation benefits. When this is the case, your Social Security benefits may be decreased so that the total amount of benefits you receive (social security benefits + workers’ compensation benefits) does not exceed a certain threshold.

The Interplay Between Workers’ Compensation & Social Security Benefits

When you suffer a work-related injury or illness as an employee, in almost any line of work in the country, there is a good chance that you will be eligible for some form of workers’ compensation benefits.

The circumstances surrounding your injury or illness (i.e. when, where, and how the injury or illness came about) will determine whether you are covered by your employer’s workers’ compensation insurance or not.

Employees with injuries and illnesses that are not covered under workers’ compensation may be eligible for disability benefits under SSDI or SSI.

The difference between workers’ compensation and SSDI/SSI disability coverage is that workers’ compensation insurance is intended to compensate injured employees if their injury or illness is work-related, while SSDI/SSI provides disability benefits to workers who become totally disabled from an injury or illness, whether work-related or not.

Consequently, there is some overlap between workers’ compensation and Social Security benefits and the interplay between the two can result in a shift in costs between one program and the other.

The Workers’ Compensation Offset

If your injury was work-related and, as a result, you are totally disabled, you may qualify as a dual recipient, making you eligible to receive both workers’ compensation benefits and Social Security benefits, subject to a cap on the total amount of benefits you can receive (essentially 80% of your pre-injury monthly earnings).

In most states, you will receive all of your workers’ compensation benefits, but your Social Security benefits will be reduced so that the total amount of benefits you receive will not exceed the cap. So, the very existence of a workers’ compensation claim means that you will receive less in Social Security benefits.

This also means that an increase in your workers’ compensation benefits will mean a decrease in your Social Security benefits, while a decrease in workers’ compensation benefits will mean an increase in your Social Security benefits.

The amount by which your worker’s compensation benefits reduce your Social Security benefits is called your workers’ compensation offset and must be treated as taxable income. So, if your worker’s compensation offset reduces your monthly SSDI or SSI payments by $300, then $300 of your monthly workers’ compensation benefits must be treated as taxable income.

Workers' Comp Reverse Offset

In about 15 states, often referred to as reverse offset states, rather than your Social Security benefits, your workers’ compensation benefits will be offset for certain kinds of injuries. New York is regarded as a reverse offset state in a very limited number of circumstances, particularly as it pertains to workers’ compensation recipients with very old injuries and who are receiving certain types of workers’ compensation benefits.

As you can see, there are a lot of moving parts involved when it comes to the interplay between workers’ compensation and public disability benefits, and things can get very complicated.

An experienced New York workers’ compensation attorney can review the aspects of your case to ensure that your taxable income is being calculated accurately.

How Lump Sum Workers’ Compensation Settlements Are Handled

Many workers’ compensation claimants prefer to settle their workers’ compensation claims in exchange for one lump sum payment, rather than a series of ongoing monthly benefit payments.

When you receive a workers’ compensation settlement in one lump sum payment, federal law allows the Social Security Administration to convert that lump sum settlement payment into a series of monthly payments for the purposes of calculating your workers’ compensation offset.

For example, let’s say that you enter into an agreement with your employer’s workers’ compensation insurance provider to settle your claim for a $30,000 lump sum payment, and before this, you were receiving $1500 per month in workers’ compensation benefits. Then for the purpose of calculating your offset, the Social Security Administration may convert the lump sum payment into 20 monthly payments of $1500 per month ($30,000/$1500).

Structuring Your Workers' Compensation Settlement to Minimize Taxable Income

An experienced workers’ compensation attorney should be able to structure any lump sum settlement you receive in a way that minimizes your workers’ compensation offset and, thereby, your taxable income.

The way this is most often achieved is by entering into an agreement with the Social Security Administration (SSA) so that any lump sum award you receive will be treated as if it were spread out over the rest of your life expectancy.

You may still be able to collect the award in one lump sum payment, but this payment will be recognized as covering the remainder of your life expectancy as determined by actuarial tables.

Using the example above, let us assume that you are expected to live another 400 months. Then, if your lawyer structures an agreement with the Social Security Administration whereby the $30,000 lump sum payment will be treated as a series of monthly payments over the full 400 months of your life expectancy, this means your offset will be calculated based on only $75 per month in workers’ compensation benefits ($30,000/400 months).

Structuring your lump sum settlement in this way will help you to minimize or eliminate any workers’ compensation offset and, thereby, any taxes you may owe on your workers’ compensation benefits.

However, the calculations that need to be performed to minimize your workers’ compensation offset need to be handled by an experienced workers’ compensation attorney, who will then add them to a document called a Compromise and Release and submit to the Social Security Administration for its approval.

Taxation on Third-Party Lawsuit Settlements

When you are injured on the job, in addition to a workers’ compensation claim, you may also be entitled to file a personal injury lawsuit against any person other than your employer or a co-employee who may have been responsible for your injuries.

A civil lawsuit filed against someone other than your employer or a co-employee who caused or contributed to your work-related injury or illness is known as a third-party liability lawsuit.

Generally speaking, any damages awarded to you in a third-party liability lawsuit for your physical injuries are tax exempt. This includes lost wages, medical bills, attorney fees, and expenses that arose from the injury itself.

The damages awarded to you in a third-party liability lawsuit may also include compensation for emotional injuries, like loss of consortium, mental anguish, and loss of enjoyment of life. However, any damages awarded to you in your settlement for emotional factors like these are taxable.

Filing a third-party liability lawsuit for your injury or illness will also allow the court to award you punitive damages. Rather than to compensate you for your injuries and losses, punitive damages are assessed against the wrongdoer to punish them for acts of negligence that were of a particularly malicious or egregious nature, or intentional.

Any part of your settlement comprised of punitive damages is considered taxable income and must be reported to the IRS. Your attorney should make sure that the settlement you reach is divided into various types of damages (i.e., compensatory and punitive) so that it is easier to report your taxable income.

Other Issues Concerning Workers' Compensation Benefits And Taxes

When it comes to workers’ compensation benefits and taxation, there are also other exceptions to the no tax rule that you should consider:

Retirement Benefits

Even though workers’ compensation benefits are generally not taxable, any retirement benefits you have received based on your age, years on the job, or contributions paid, must be treated as taxable income. This is the case even after you have retired because of an illness or injury that gave rise to a workers’ compensation claim.

Going Back to Work

Most workers’ compensation recipients go back to work at some point. Some of them go back to work on “light duty” while they continue to heal and receive some workers’ compensation benefits. Any income you earn while you’re still receiving workers’ compensation benefits is treated as taxable income.

Interest Payments

Sometimes workers’ compensation benefits are paid with interest. This is often the case when an insurance company is guilty of unfairly delaying your benefits or egregiously mishandling your claim. Any interest you receive must be treated as taxable income.

Survivors’ Benefits

Workers’ compensation benefits received by surviving family members after a worker’s death are not treated as taxable income.

Contact an Experienced New York Workers’ Compensation Attorney

If you have any questions regarding taxation and your New York workers’ compensation benefits, it is essential that you consult with a knowledgeable and experienced New York workers’ compensation attorney.

The rules regarding federal and local taxes on workers’ compensation benefits, as well as the interplay between workers’ compensation and Social Security are often challenging to understand. In some cases, attempting to comprehend these rules on your own may ultimately prove to be a costly mistake.