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Are the Benefits I Receive Through Workers’ Compensation Taxable?

The short answer to this question is “no,” but there are some caveats to the answer. While Workers’ Compensation benefits are not considered taxable income at the federal or state level, those receiving benefits through Social Security disability insurance or Supplemental Security Income in addition to Workers’ Compensation may have their benefits taxed.

For some, their SSDI or SSI may be reduced to ensure the combination with Workers’ Compensation is below a threshold of payment, known as the Workers’ Compensation offset. The amount of Worker’s Compensation that would be taxable is the amount your disability payments are lowered to stay within that threshold.

In these cases, it pays to have an experienced Workers’ Compensation attorney on your side. A good lawyer will be able to ensure the offset will be minimal and reduce how much of your income is subject to taxes. However, it is important to know that most people who have this offset most often don’t have enough taxable income to owe federal taxes. As such, it is unlikely you will owe taxes, even under this exception.

Reduce Taxable Income in Workers’ Compensation Settlement

Structuring your Workers’ Compensation with an experienced lawyer can alleviate a lot of taxable income concerns. Not only can it help minimize the Worker’s Compensation offset, it can limit the amount of taxes you will have to pay.

One way to avoid unnecessary taxable income is to receive a lump sum that should be treated as though it were to spread out throughout your expected lifetime. This will cover the rest of your lifespan while avoiding thresholds found in monthly payments.

When Does an Offset Apply?

When receiving both types of compensation, the total benefits cannot exceed 80% of your average earnings at your current employment. These average earnings are considered the largest out of the following:

  • Average monthly wage
  • One-sixtieth of total wages in highest earning five years
  • One-twelfth of total wages in highest earning year out of the last five years

If you are filing for Workers’ Compensation and are concerned about going over the threshold, contact our lawyers at Vanasse Law today. We will help structure the best payout for your individual needs and ensure your needs are financially met.

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