After a workplace injury, you may receive workers’ compensation benefits to pay for medical care and to make up lost wages. Although Colorado workers’ comp can sometimes seem like a straightforward process, it can include several complex legal issues. At tax time, you may have new questions about your work comp benefits or settlement. Finding out if you owe taxes on workers’ comp is an important task as a beneficiary.
If you owe taxes but fail to pay them, the Internal Revenue Service (IRS) may come knocking for an audit, unpaid tax penalty and other tax-related problems. Our Denver workers’ compensation lawyer can help you understand if your settlement or verdict may be taxable.
What type of workers’ comp benefits did you receive?
Workers’ compensation is a system put in place to provide financial assistance and medical care to employees who are injured or become ill as a result of their work. However, this system is not without its own set of rules and regulations, and one area that can be particularly confusing for employers and employees alike is taxes on workers’ compensation.
To understand the tax implications of workers’ compensation, it is important to first understand the difference between taxable and non-taxable benefits. Non-taxable benefits include things like medical expenses, rehabilitation, and death benefits. Taxable benefits, on the other hand, include things like permanent disability and lost wages.
General rule on taxation of work comp benefits
The majority of workers’ compensation awards are tax-free on both the state and federal levels. These types of awards are classified by the government as nontaxable income. Welfare benefits, compensatory damages in a personal injury claim, and no-fault disability insurance benefits are examples of nontaxable income. In Colorado, you will most likely not have to pay any taxes on your workers’ compensation settlement. Payments for medical expenses, disability expenses, and lost wages will all be tax-free. Survivors who receive wrongful death benefits through workers’ compensation will also be exempt from paying taxes.
Exception for Social Security Disability Benefits (SSDI)
However, there is a significant exception to the rule. If, as a result of a workplace accident, you receive Social Security Disability benefits in addition to workers’ compensation. If the Social Security Administration (SSA) approves your application for Social Security Disability Insurance or Supplemental Security Income in addition to workers’ compensation, the government may tax you for a portion of the benefits. As a worker’s compensation recipient, your Social Security benefits may be reduced. The difference between your workers’ compensation payments (the workers’ compensation offset) is then taxable. If you believe you may have claims for SSI or SSDI benefits, you may need the help of a disability attorney to pursue those benefits.
The majority of injured workers receive only a small portion of the difference between Social Security benefits and workers’ compensation. In most cases, the taxable offset is only a few hundred dollars. Higher awards, on the other hand, may necessitate the recipient paying more in taxes. If you decide to retire while receiving workers’ compensation benefits, you may need the assistance of a tax attorney to organize your finances in such a way that you pay the least amount of taxes. The same holds true if you are awarded a civil lawsuit award in addition to workers’ compensation.
When to pay taxes
If a workplace accident results in permanent disability, you may be eligible for Social Security Disability benefits in addition to workers’ compensation. In these cases, the Social Security Administration will reduce your benefits to account for the additional money received through the workers’ compensation system. Calculate how much of an award you may have to pay taxes on by adding half of your SSA benefits to your other income. Certain amounts of your benefits may be subject to taxation.
- If the amount exceeds $25,000 and you file as a single, head of household, married filing separately (and living separately), or widow with a dependent child.
- If the amount exceeds $32,000 for married taxpayers filing jointly.
- If the amount is zero as a married taxpayer filing separately who lived with your spouse the previous year.
Taxes on workers’ compensation can be a complex and confusing topic, but understanding the obligations of both employers and employees is crucial. By being aware of the different types of benefits and the taxes that apply to them, employers and employees can ensure that they are in compliance with the law and avoid any potential penalties or fines.
The IRS may tax you on the full amount of Social Security Disability benefits you receive. Even if the Social Security Administration reduces your actual award due to workers’ compensation, you may be taxed on the full amount. Keep in mind that most Colorado workers who receive workers’ compensation do not have to pay taxes on their awards. Only those who receive Social Security may be taxed. By structuring your settlement in a specific way, a personal injury lawyer may be able to reduce the amount you will owe in taxes. For personalized taxation advice, consult with a qualified lawyer.