Most employee benefits are not taxed at state or federal level. However, some employee benefits can be taxed if you also receive Social Security invalidity insurance (SSDI) or an additional security supplement (SSI). Are workers compensation payments taxable?
Compensation for employees belongs to the same category of non-taxable income as:
- Payments from the public social assistance fund;
- Compensation (but not sanctions) for injury or illness;
- Benefits for inability to work under a car insurance policy “through no fault” for loss of income or earning capacity as a result of injury;
- Compensation for permanent loss or loss of use of parts or functions of your body, or for permanent deformation.
In other words, for the purposes of federal income tax, employee compensation granted under the Act or the Act on Employee Compensation for Sickness or Work-Related Injury is completely tax free. Payments to survivors in the same circumstances are also exempt.
When is the employee compensation applicable?
If you receive both employee compensation and a social security pension, the total amount of benefits may not exceed 80% of your average current earnings. Your “average current earnings” are defined as the largest of:
- average monthly salary used to calculate the amount of benefits
- one sixth of the total salary for the best earning five years in a row, or
- one-twelfth of your total highest earning year out of the previous five.
In most states, your social security benefits are reduced until you exceed the 80% threshold. A minority of stocks have a “reverse shift” in which employee contributions are reduced.
Social security will deduct legal fees, past and future medical costs, payments to dependents and other expenses from the employee’s amount before calculating the deduction. For you or your lawyer, you must inform Social Security about these expenses and provide the appropriate documentation.
When you need help
To sum up: most people will not have to pay taxes on employee benefits. Even if so, the tax should cover only a small proportion of these benefits. But it would be wise to talk to a lawyer if you are worried about offset because you qualify for both SSDI and invalidity pensions through employees. An advocate with experience of employee compensation or disability can save money by helping to minimize as long as employees reduce social security benefits.