Are Workers’ Comp Settlements Taxed?

Are Workers' Comp Settlements Taxed In Washington D.C.?

Workers’ compensation benefits play a crucial role in providing necessary financial and medical support for employees who sustain injuries or illnesses as a direct result of their employment. These benefits are designed to help cover lost wages due to time spent away from work and the costs associated with treatment, rehabilitation, and recovery.

Considering its importance in protecting workers’ livelihoods after workplace incidents or health issues, it is also essential to understand how receiving these benefits might impact your tax situation.

Taxes Are Typically Not Taken Out of Workers’ Comp Benefits

When you receive workers’ comp benefits, there usually aren’t any taxes taken out of them. This means that what you get from your workers’ comp benefit is usually the full amount awarded to you by your claim without any reductions for tax purposes.

Workers’ Comp Benefits Are Typically Not Taxable

In Washington, D.C., as in many jurisdictions across the United States, workers’ compensation benefits generally are not considered taxable income at either the federal or state level. This means that if you receive workers’ comp benefits due to a work-related injury or illness, these amounts won’t be included in your taxable income when you file your tax return.

When you sustain an injury on the job that prevents you from working, workers’ comp benefits help by compensating for a portion of your lost wages. However, these benefits typically do not match your full salary or regular pay rate – they are a fraction of what you would normally earn.

Recognizing this reduction in income and considering the purpose behind these payments – to cushion the financial blow while recovering – the IRS decided that it’s unfair to tax someone on an amount intended to help them during this time.

Exceptions – When Workers’ Comp Benefits Might be Taxable

Under general circumstances, workers’ comp benefits, which compensate for lost wages due to a work-related injury or illness, do not affect an individual’s tax return because these benefits are not considered taxable income. However, in cases where recipients of workers’ comp also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), their situation may be slightly different.

If the total amount received from SSDI/SSI and workers’ compensation exceeds a certain threshold, their lost wage benefits from worker’s compensation may become partially taxable. This is designed to prevent an individual’s combined income sources under disability assistance programs like SSDI/SSI from exceeding what would have been normal earnings if they were still able to work.

Always Reach Out to A Lawyer For Help

Given the complexities of how workers’ comp benefits interact with other forms of disability assistance and their potential impact on your taxes, it’s important to consult with both a legal professional and a tax expert.

An experienced Washington D.C. lawyer that focuses on workers’ compensation can advise you about the specifics around receiving workers’ compensation, while a tax professional will offer guidance tailored to your individual situation ensuring that you meet all income reporting requirements when you file your taxes.

If you have further questions regarding workers’ comp, help is always available. Contact us for personalized assistance and let our experienced team guide you through the complexities of workers’ compensation law and your tax requirements. Reach out today for a free consultation.