People who are receiving workers’ compensation benefits after a workplace accident need every dollar of benefits that they are eligible for. One of the most common concerns among many first-time recipients is whether their benefits may be taxed. The good news is that workers’ compensation benefits are generally tax-free so you don’t have to pay state or federal taxes on them.
However, there is one notable exception. When a person is also receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits, part of their workers’ compensation may become taxable income.
Federal Tax Rules for Workers’ Compensation
According to IRS Publication 525, “Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they’re paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.
This federal exemption covers weekly indemnity payments, lump-sum settlements, scheduled loss awards, and death benefits paid to survivors.
Because South Carolina and North Carolina both adopt the federal definition of gross income without modification to the workers’ compensation exclusion:
- You will not pay federal or state income tax on these benefits
- You will not receive a Form W-2 or Form 1099 for workers’ compensation payments
- You are not required to report workers’ compensation benefits as income on your federal Form 1040, South Carolina SC1040, or North Carolina D-400 tax return.
What to Know About Workers’ Compensation
Most employees who are injured on the job in the Carolinas are entitled to workers’ compensation benefits. Workers’ compensation covers medical expenses and partial wage loss for employees who are injured while working or provides money to eligible family members who’ve lost a loved one in a workplace accident.
Offsets and Exceptions to Tax-Exempt Status
Workers’ compensation is considered income, but it is not taxable and does not need to be reported on a person’s IRS forms. But when a person is receiving disability through the Social Security Administration, the workers’ compensation benefits could be taxed if they offset the disability income. Simply put, you cannot receive your full amount of disability benefits and workers’ compensation at the same time.
Instead, Social Security will reduce the disability payment until you receive 80 percent of your pre-injury earnings. The portion that was reduced may be taxed, but only if your income exceeds $25,000 individually or $32,000 if married.
Reducing Taxable Income Through Your Workers’ Compensation Settlement
When you are negotiating a settlement, you want to minimize the tax consequences. An experienced workers’ compensation attorney can structure the settlement carefully to try to accomplish that goal.
For example, some workers’ compensation cases can be resolved through settlements that provide a lump sum rather than ongoing payments. However, the wording of the agreement is very important because Social Security will be looking at it to determine how much of the settlement is subject to offset. An attorney who knows how to carefully draft these documents can strive to achieve the most out of your workers’ compensation benefits.
How Can Stewart Law Offices Help Me?
If you or your loved one need assistance filing a workers’ compensation claim in South Carolina or North Carolina, you don’t have to handle this complex process by yourself. Let the knowledgeable attorneys at Stewart Law Offices help you seek the full and fair settlement you deserve.
You can call us 24 hours a day, seven days a week, including evenings, weekends, and holidays. Call 866-783-9278 or contact us online to set up a free consultation.
