California law requires that employers have workers’ compensation insurance in case their employees suffer injury or become ill. This insurance comes in handy after an employee incurs medical expenses and is incapable of working or collecting a paycheck. In this case, the employee is entitled to benefits from the employer’s insurance company. Federal or state agencies may tax these compensation benefits. If you’ve suffered a work-related injury/illness in LA and are receiving workers’ comp benefits, you can discuss the tax implications with knowledgeable attorneys at The Workers Compensation Lawyer Law Firm.

Overview of Workers’ Compensation Law and Benefits in California

If you suffer any illness or injury while working, you may qualify for workers’ comp benefits. California workers’ compensation law was enacted to provide medical benefits and financial compensation to employees who suffer a work-related illness or injury. Under this law, your employer must pay for workers’ comp insurance to cover you as an employee. The law provides that you are entitled to:

  • Medical benefits. These include all hospital and medical benefits necessary to relieve you from or cure the effect of the illness or injury. Medical benefits also include compensation for traveling to and from the hospital/physician’s office.
  • Temporary disability benefits if your illness or injury requires that you miss over three days of work or causes hospitalization
  • Permanent disability benefits if your condition or injury cause some permanent impairment
  • Training/vocational rehabilitation benefits if you must retrain and change jobs or job positions due to your injury/illness,
  • Return to work fund. This compensation provides extra help to injured employees who can’t return to their jobs.
  • Lost wages if you can’t earn income while nursing your work-related condition or injury
  • Compensable consequences benefits if your initial on-the-job injury causes any other problems
  • Death benefits— your dependents may be entitled to death benefits if you die due to a work-related injury or illness. Your death does not have to occur at work. Provided the condition that caused the demise is job-related, your dependents may obtain death benefits.

The state’s workers’ comp no-fault system will award you benefits whether you are a construction employee who has injured your leg while working or a plant operator who has hurt your back carrying heavy inventory boxes. The same applies if you’re suffering from a work-related illness. For example, a plumber who is constantly exposed to sulfur dioxide while working and falls ill may need treatment and time to recuperate. In this case, their employer’s workers’ comp insurance will help pay for the medical bills related to the on-the-job illness and compensate for the work time lost while recovering from the sickness.

An attorney doesn’t have to represent you when claiming your workers’ comp benefits. However, note that your employer and their insurance provider will be represented, at least, by an expert insurance claims adjuster and perhaps, also, by an experienced lawyer. If a dispute arises, you too ought to be adequately represented; otherwise, you’ll be at a substantial disadvantage.

Tax Compensation Benefits and Taxation

When receiving workers’ comp benefits, you may wonder whether you will have to pay taxes on them. The quick answer is that, generally, California’s workers’ comp benefits aren’t taxable. It does not matter if you receive the benefits for muscle strain, tendinitis, back injury, carpal tunnel, or a slip and fall accident. In many cases, you won’t pay taxes on your workers’ comp benefits.

Workers’ comp is a federally funded, public benefit meant to protect ill or injured employees while they recuperate— it is not earned income under the current tax statutes. Since it’s a service funded by taxes, it’s free from taxes that’d otherwise feed their own funds back in the system.

Workers’ compensation benefits lie in one tax category with other government-issued benefits like personal injury compensation or public welfare. This also does apply in survivor’s benefits cases. The temporary or permanent disability benefits an employee receives under the no-fault auto insurance policy designed to compensate for the loss of earning capacity or lost wages because of an illness or injury also belong to this tax category. An income obtained through this manner won’t have any withholding, neither will you be required to pay any taxes when you file your returns on the 15th of April. The benefits aren’t taxable both at the federal and state levels.

Per the IRS (Internal Revenue Service) publication 907, benefits obtained in the form of workers’ comp are entirely exempt from taxation if they’re paid in accordance with a workers’ comp Act or similar law. You won’t pay tax on your weekly lost wages benefits, the value of medical expenses incurred, or your workers’ comp final settlement. This tax exemption regulation also applies to your surviving dependents if you die due to a work-related injury and are eligible to receive death benefits.

There Are Exceptions

There are a few exceptions to the tax-free status of workers’ comp. You may have to pay taxes on your workers’ benefits if you’re also receiving social security benefits, including Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI). For instance, if you:

  • Suffer a job-related permanent injury and receive both SSDI and disability benefits, your workers’ comp benefits may become taxable
  • Sustain a work-related injury and have to take several months off from work to recuperate, workers’ comp will cover some of your lost wages, but you will also receive SSI. For this reason, you may have to start paying taxes on your benefits.

The difference between SSI and SSDI has to do with eligibility. Supplemental Security Income is a welfare program designed to provide healthcare and cash every month to anyone who needs it. To qualify for this program, you must be on a limited income, disabled or blind, above six-five years old, and a United States citizen. People who qualify for SSI might never have worked before or do not have sufficient work credits to apply for SSDI. Supplemental Security Income payments aren’t taxable.

On the other hand, Social Security Disability Insurance is a federal insurance program that is tax-funded. You receive monthly SSDI benefits if you’re disabled, have limited income, and you paid Social Security payroll taxes for a given period (usually five to ten years).  You can receive SSDI when you have sufficient work credits, depending on how long you have paid Social Security taxes. Social Security Disability Insurance benefits are taxable.

There’s a rule guiding federal benefits, and it provides that your combined SSDI income and workers’ compensation benefits can’t exceed 80 percent of what you earned before being injured. Social security benefits offset any income beyond this limit. Whether SSI and SSDI, the income reduces, and the offset is taxable. Remember, the federal government taxes your social security income and not your compensation benefits, although it’s the workers’ compensation that’s the payout.

To calculate your social security benefits, Social Security utilizes the largest of these three numbers:

  • 1/12 of your total income from the highest-income year in the last five years
  • 1/60 of your total income in your consecutive five highest-income-earning years
  • You average monthly wages depending on your first benefits application

Most employees receiving workers’ comp aren’t also receiving social security benefits. However, in cases where an employee’s condition worsens, they could end up obtaining benefits for permanent disability. Other public benefits could affect your taxability, for example, retirement benefits. Return to work benefits may also impact the tax liability on your earlier received workers’ compensation benefits.

Benefits could also be taxed if you exceed given base income amounts for your current tax situation. For instance, earning over twenty-five thousand dollars and your status indicates you are a single filer could lead to taxable earning. The earning for a married tax filer is thirty-two thousand dollars, and only zero dollars for a married filer filing their tax returns separately from their spouse. Always remember this if you’re planning on filing tax returns separately and you are married.

In certain cases, workers’ comp benefits might have a lower enough tax liability to have just a trivial effect on your money. If your income before the injury, for instance, was three thousand dollars a month, you can’t go above 80 percent of that sum with the workers’ compensation and SSDI income. Therefore, if you are awarded above two thousand four hundred dollars for benefits, which is eighty percent of three thousand dollars, the Social Security Disability Insurance will be two thousand four hundred dollars. The taxable percent of your SSDI income is the offset. If your reduction is a hundred and fifty dollars, that’s the amount of money that could be taxable.

Since workers’ comp benefits aren’t taxable, there’s no need for you to report them to the IRS as income when filing returns unless you meet the tax-exempt exceptions that could apply. Whether you collect benefits for lost wages on a continuous basis or a lump sum settlement, the money is not taxable. This means you don’t need to report it to the IRS. When collecting your workers’ comp check, you won’t find any tax notification documents. It is also not necessary to list this info anywhere whenever filing your tax returns.

How Do You Know Whether You Must Pay Taxes On Your Comp Benefits?

We have many ways to determine whether you owe taxes. You will have to pay taxes on the amount of money indicated on form W-2. Form W-2 is an IRS tax form used to report wages paid to workers and the taxes withheld from them. Your employer must fill this form for you if they pay you a wage, salary, or any other compensation as part of the employment relationship.

The amount on W-2 will not reflect on your workers’ comp benefits. Any other benefits that could be considered income might reflect in this amount. Additionally, you could reach out to a workers’ comp lawyer if you have concerns or questions regarding your tax liability once you receive your workers’ comp benefits.

How to Minimize Your Taxable Earnings and Maximize Your Benefits

In a situation where you receive SSDI and workers’ comp benefits simultaneously, you want to involve a workers’ compensation lawyer. The lawyer can draft your benefits settlement in a way that reduces workers’ comp offset and the taxes you may need to pay. Essentially, your workers’ compensation settlement should state that the lump sum must be considered as though it’s distributed over a specified period. Therefore, instead of receiving small regular payments, you’ll collect a lump sum. Although, depending on actuarial life tables, the lump sum covers the remaining years of your anticipated lifespan. You want to ensure the monthly payment rate is established in your settlement agreement.

Consider this example: Let’s say you collect $20,000 in compensation benefits, your expected lifespan is thirty years (360 more months), and your lump sum is distributed over your entire lifetime. If that’s the case, the Social Security Administration agency will determine any SSDI reduction if your combined workers’ comp and SSDI income exceed 80 percent. It’ll find that your monthly amount will be $55.55 per month ($20,000 divided by 360 months). However, instead of collecting the benefits monthly over 360 months, you’ll receive them in a single payment. And because you’d have a low monthly workers’ comp income, you would reduce tax liability and retain more Social Security Disability Insurance payments.

It is essential to know that in given cases, your workers’ compensation benefits will be spread only through your date of retirement rather than being spread over your entire actuarial life. Irrespective of how your benefits are distributed, you workers’ comp benefits tax liability can be wiped out by a settlement agreement that’s well structured.

For you to make Social Security agree to a lump sum payment, you must include an amortization provision in your settlement agreement. You must include the amortization provision in the initial settlement because including them later would draw attention to Social Security as it might appear as though you’re trying to evade the reduction. In other instances, annuities may be utilized in the settlement, meaning the Social Security will use the annuity to calculate the workers’ comp offset.

The payment of unpaid-due comp in a lump sum isn’t the same thing as a lump sum in a benefits settlement agreement. When it comes to a lump sum settlement agreement, you take a cash payment in a lump sum, therefore, releasing your employer or their insurance company from responsibility for future monthly benefits payment and future medical costs. If you’re incapable of settling with the employer/their insurer and proceed to court, the judge won’t grant lifetime amortization that could help in maximizing your compensation benefits. By this, it means you won’t be capable of minimizing the offset; therefore, you’ll be stuck with the permanent disability rate in your settlement.

Other Benefits That Could Be Taxable

It’s also worth bringing to your attention that just because your comp benefits are not taxable doesn’t mean any income you collect will be tax-free. Retirement benefits, investments, interest payments, the money you win in lawsuits or through inheritance, and even the wages you receive for small jobs as you recuperate could still be taxable.

Interest Payments

At times, workers’ compensation is paid with interest if the insurer caused a substantial delay or engaged in egregious behavior. If that is the case, the interest paid will be taxed.

Retirement Benefits

Despite workers’ comp being generally tax-free, the retirement benefits you receive depending on the years you have served, your age or past contributions aren’t tax-exempt. This applies irrespective of whether you’ve retired due to an injury or illness that made you file a workers’ comp claim. But the workers’ compensation offset doesn’t apply if you’re collecting retirement benefits. Early retirement may give you a low monthly Social Security payment. However, you want to consult a lawyer to find out whether early retirement is worth the risk.

Return to work

Many employees who receive workers’ comp benefits go back to work in the end. Some even do lighter tasks and collect wages while they continue to also receive their comp benefits. It is critical to remember that any salary you earn when you are still receiving workers’ compensation benefits is taxable.

Consider this example: let’s say you’re a construction employee who sustains an on-the-job back injury. You seek treatment, and your doctor recommends that you avoid lifting anything beyond 15 pounds. While you are incapable of returning to your usual job position, your employer gives you a job position that doesn’t involve any lifting and awards you the same salary as before you were injured. The salary you earn while at that position is taxable income. However, if they pay you a lower amount for the light-duty job position, you would be eligible for temporary disability benefits. These benefits are tax-free, but your salary for your new job position is.

Other Tax-Deductible Costs

Receiving workers’ comp benefits is usually easier said than done. Employers and insurers alike at times try downplaying an employee’s injuries to avoid substantial benefits payouts. The insurer wants to safeguard its bottom line while the employer wants to evade an increase in their premiums. Consequently, most workers’ comp claimants are forced to employ legal means to seek and be awarded their deserved financial aid.

Whereas this isn’t ideal, the good part is that any legal fees related to your case of seeking workers’ comp may be tax-deductible. All the funds you spend in the form of courtroom costs and attorney fees, for instance, could be a deduction on your net tax filing. Even though this isn’t the same thing as receiving a refund, it’s still beneficial if you want to pay closer attention to your finances.

Will You Receive Form 1099 for Workers’ Comp Benefits?

Form 1099 is the form the IRS calls information returns. The form is a report that lists different forms of income you receive all through the year. It includes separate forms of income and the earnings your employer paid you. Separate income is things such as government payments, dividends, and interests.

Most people often ask whether workers’ compensation payments reflect on form 1099. The answer to this question is no because form 1099’purpose is determining what you should pay taxes on. Because workers’ compensation payouts aren’t taxable, they don’t have to reflect on form 1099.

Workers’ Compensation Counts as Income for Medicaid

When you apply for Medicaid, what you receive in a lump sum and the amount of money you are receiving as ongoing benefits will be evaluated to see if you meet asset and income guidelines.

Medicaid refers to a program operated jointly by state and federal governments. It is the largest source of health coverage in the United States and is funded by state and federal governments. States that participate in Medicaid must comply with federal rules. Although it helps people facing various medical problems regardless of their assets and income, there are asset and income limits for most individuals. Lump-sum agreements and workers’ comp benefits are considered when establishing eligibility for Medicaid.

Find a Competent Workers’ Compensation Attorney Near Me

Workers’ compensation insurance and benefits are complicated topics that you may need help understanding. Particularly, if you are receiving workers’ compensation benefits, you should know whether they come with any tax implications. For this reason, you may have to talk to an experienced lawyer. Workers’ compensation is designed to protect you against a work-related injury, and if your injuries are severe, your benefits and taxes could be complicated. An attorney knowledgeable in the field of workers’ compensation can give you helpful legal advice to prepare for any outcome.

At The Workers Compensation Lawyer Law Firm, we have several years of experience helping protect employees in Los Angeles injured on the job. We can respond to your questions regarding workers’ benefits and taxation and help you determine what benefits you qualify for and calculate the correct amount you deserve. Contact us at 424-501-9228 to schedule a consultation.