It is incredibly stressful to suffer a workplace injury. Aside from taking care of the immediate physical aftermath of your accident, you may also feel unsafe in your workplace. You may even need to take time off to fully recover from your injuries. The good news is that Colorado workers may be entitled to file for worker’s compensation if the accident occurred while the employee was carrying out their job duties on work hours.
A successful worker’s compensation claim can take a giant load off your back. You no longer have to worry about lost wages or medical expenses and can instead turn your attention to the number one most important thing: your recovery. However, it is not uncommon for injured workers to still have questions once they receive worker’s compensation benefits.
For example, you may be wondering what portion (if any) of your final worker’s compensation settlement is taxable. Or you may be asking yourself if you will need to claim your worker’s compensation benefits as income when you are filing your taxes. Understandably, such questions can be totally overwhelming when you are in an already vulnerable state.
Luckily, we at Injury Victim Law are here to help. In this blog post, we will give you a brief overview of the basics of taxes and your worker’s compensation claim. Read on to find out more.
The short answer: No, worker’s compensation settlements are not taxable.
The long answer, for those of you who want specifics: Both Colorado and federal legislature prevent injured workers from being taxed on their settlements in any capacity. It may even help to think of a worker’s compensation claim like a personal injury claim. While the two are certainly two different entities, they do still share some similarities. Possibly the biggest similarity they share is that any settlement amount that they bring about cannot be subjected to either state or federal taxes.
You may be wondering why exactly this is the case. For one thing, worker’s compensation settlements (like personal injury settlements) are not considered to be “earned income” under current tax laws. For another thing, the IRS’ Publication 907 directly states that “Workers’ Compensation for an occupational sickness or injury if paid under a Worker’s Compensation Act or similar law” is not taxable. In most cases, this is true of both structured weekly wage loss and lump-sum payments.
This is how the IRS came to that conclusion: Worker’s compensation is only available to those individuals who have suffered a significant injury on the job. More often than not, these injuries will cause you to miss at least a little bit of time off work. Furthermore, any benefits you receive for lost wages will be at a reduced rate from your normal pay. The natural conclusion, then, from both the IRS and the Colorado legislature is that it would be grossly unfair and unjust for such settlements and benefits to be taxed. This also applies to any worker’s compensation benefits that have been paid to any survivors under worker’s compensation death benefits.
There are always special cases that prove to be the exception to the rule. This is also true when it comes to worker’s compensation settlements and taxes. For example, if you go back to work during your recovery period and take on a modified role, you will be making taxable, “earned” income. But do not worry—this will not affect any worker’s compensation wage loss benefits you are receiving. Plus, any pension based on age, years of service, or other such factors may also be taxable. Exceptions may apply if part of that plan is paid through worker’s compensation, in which case that specific portion will not be taxed.
While the above are two fairly straightforward and simple examples, there is still a variety of more complicated and confusing configurations that may occur. If your worker’s compensation benefits are combined with Social Security Disability (SSDI) or a retirement plan, for instance, it is possible that any supplemental benefits you receive (e.g., SSDI or Supplemental Security Income [SSI]) will be taxed at the applicable rate.
Furthermore, some injured workers may also have already been receiving disability benefits (e.g., SSDI or SSI) since even before their workplace accident. If this is the case for you, it is possible that the Social Security Administration (SSA) will reduce your SSDI or SSI payouts in order to keep the combined amount of your disability payments and worker’s compensation benefits underneath a certain threshold. This phenomenon is even common enough to have a name: the worker’s compensation offset.
According to the tax court, SSDI benefits may “be includable in a taxpayer’s gross income pursuant to a statutory formula.” In other words, under section 86(d)(3), the amount of worker’s compensation benefits you receive may also count under the amount of SSDI you receive. This is why it is called an offset—because you can only get so much worker’s compensation benefits if you reduce the amount of Social Security benefits you receive. This makes it incredibly important for you to seriously consider all your options when it comes to SSDI and permanent disability. It may feel difficult to make the right decision, especially if you do not have full and comprehensive knowledge of the law. Fortunately, a competent and trusted worker’s compensation lawyer can help.
If you or a loved one have recently been injured in a workplace accident, we at Injury Victim Law may be able to help. Though we are a Colorado-based firm, our team of experts and investigators is ready and available to assist personal injury victims all across the country. You should never have to pay for someone else’s mistakes. Contact us today to schedule an initial consultation with one of our experienced nationwide worker’s compensation attorneys. We have helped countless clients resolve their cases successfully. We can help you, too. Let us fight for you and get you the compensation you rightfully deserve.