Most workers who are injured on the job are able to return to work after a period of recovery. Other workers may not be able to return to work due to more serious injuries. Although the tax treatment of workers' compensation is straightforward, individuals may need to develop a strategy to minimize the effect of workers' compensation on Social Security disability income.
For tax purposes, workers' compensation received for a job-related injury or illness is generally not taxable. Even if a portion of the amount is for lost wages, workers' compensation received from your employer's insurance provider is usually tax-free. If you return to your job after an injury or illness, wages paid by your employer are taxable.
For more serious injuries, rehabilitation can require a much longer period of time. If you receive worker's compensation for injury or illness in the form of a disability pension, it is generally nontaxable. However, any portion of the pension based on your number of years on the job is taxable income.
Effect on Social Security disability income
Individuals who receive Social Security disability income may be affected by the receipt of workers' compensation. The combined total of workers' compensation, Social Security disability benefits, and any other public disability benefits cannot exceed 80 percent of your average earnings prior to the injury or illness. Your Social Security disability benefits are reduced by any excess amount.
The reduction in Social Security disability income is only applicable in the years before you reach retirement age. At that point, you become eligible for regular Social Security benefits. If you receive both workers' compensation and Social Security disability income, there are several factors that affect the potential reduction in your total benefits.
Any benefit from the Department of Veterans Affairs is not included as a public disability benefit. Private pensions are not considered for purposes of the offset. If you are negotiating a workers' compensation settlement, it can be drafted so that the effect of workers' compensation on your Social Security disability income is minimized.
Deductions are allowed to reduce the amount of your workers' compensation income subject to the potential offset. The amount of workers' compensation considered for the offset is reduced by the total of your medical and legal expenses.
The potential offset no longer applies after you start receiving regular Social Security retirement benefits. If you are receiving Social Security disability income and approaching retirement age, you might consider filing for regular benefits at age 62 to stop the offset at that point.
If you are concerned about the effect of a workers' compensation settlement on your Social Security disability income, seek legal advice. Consult with a worker's compensation attorney (such as Leen and Emery) for assistance in drafting a settlement that provides you with the most monthly income.
After being involved in a serious auto accident with a drunk driver, I struggled heavily with getting the driver's insurance company to open a claim. When the insurance company started pushing back, I knew I needed to do something. I spent a lot of time digging through the laws surrounding auto accident claims so that I knew what my legal rights were. I even talked with an auto accident attorney. I created this site to teach others about what I learned, including my court experience. I hope it helps you to determine how you should proceed with your auto accident case.