Workers’ Compensation and Taxes

Even though the deadline for filing taxes has been pushed back, employees receiving workers’ compensation wage payments or receives a workers’ compensation settlement will likely have questions about whether the wage part of their benefits is taxable at the federal or state level. At Silverman, McDonald & Friedman, our Delaware workers’ compensation lawyers understand the circumstances when work pay benefits may be taxable and what’s not taxable. We handle workers’ compensation cases in our Newark, Seaford, and Wilmington offices.

According to the Internal Revenue Service, workers’ compensation payments for an injury or occupational illness are “fully exempt from tax” if the payments are paid through a workers’ compensation act – such as Delaware’s workers’ compensation law. The exemption also applies to survivors if someone tragically dies due to a workplace injury or occupational illness.

This means that deductions are not taken out for your workers’ compensation pay for any taxes. Generally, you do not need to report the workers’ compensation income on your tax returns.

Interest payments on workers’ compensation benefits, however, are usually taxable.

When your workers’ compensation might be taxable

One common concern for workers who receive a regular workers’ compensation payment or a lump sum settlement is, what happens if they are also receiving a disability benefit (either through Social Security or through a private disability plan).

If you receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), then, generally, if your combined SSDI and workers’ compensation benefits are more than 80% of your full-time pay, then your SSDI benefits (or workers’ compensation benefits) may be reduced down to the 80% level. The amount of the reduction is called the workers’ compensation offset. The amount of the offset is taxable if you receive weekly or regular payments.

The amount of the reduction is also taxable if you receive a lump sum settlement. Generally, an experienced Delaware workers’ compensation lawyer can work to reduce the amount of the offset in a lump sum settlement – such as by providing in the lump sum agreement that the lump sum should be considered as being paid out over your lifetime so you don’t get taxed all in one year.

For private disability pensions, the IRS will review the how the disability pension makes payments and any applicable statutes that authorize the pension.

Anyone injured at work needs every dollar they can get. At Silverman, McDonald & Friedman, our experienced Delaware workers’ compensation lawyers explain that most work injury benefits are not taxable unless they are combined with other disability benefits. For help with all aspects of your workers’ compensation case, call us at 302.314.5553 or fill out our contact form. to schedule an appointment. We have offices in Wilmington, Newark, and Seaford.