In California, money from workers’ compensation benefits is not taxed in most situations. Workers’ compensation is a public benefit funded by tax dollars. Because of this, none of it is withheld for tax and you won’t owe the IRS or state of California anything for your workers’ comp benefits come April 15.
For many injured workers, knowing this comes as a relief around tax season, when they fear they must consider a new source of income while preparing their tax returns.
The Social Security Disability Offset
If you receive both workers’ compensation benefits and Social Security Disability Insurance (SSDI) benefits, your combined income from these sources can be no more than 80% of the average gross income you earned before your disability.
If your combined income exceeds this threshold, then your SSDI benefits are reduced by an amount that brings your income back down to 80% of your pre-disability earnings.
This Offset Can Be Taxed
When your SSDI benefits are reduced to account for income from workers’ compensation, the offset amount is taxed. This happens because the amount reduced from your SSDI benefits could have been taxable if it came from Social Security instead of workers’ comp.
Conclusion
If you aren’t receiving Social Security Disability benefits, you don’t have to worry about the government taxing workers’ comp money. If you do receive these benefits, though, ascertain whether or not workers’ comp benefits are creating an offset. If they are, you should plan on factoring that amount into your tax return.
If you have more questions about workers’ compensation or require legal assistance, reach out to Smolich and Smolich online!