Are Taxes Taken out of Your Work Comp Check?

Work Comp Q&A: Are Taxes Taken out of Workers' Compensation Payments?

Wondering whether a workers’ comp settlement or regular payments are taxable? 

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In this article, we will answer this question and more, providing explanations that will give you a broader understanding of how workers' compensation and your tax liabilities intersect:

Are taxes normally taken out of workers' compensation payments?
When are taxes taken out of workers' compensation payments?
Are there ways to reduce my tax liability for workers' compensation payments?
Are there alternatives to workers' compensation payments for injured workers?

As you read this article, be sure to write down any pertinent concerns or questions that you may have for an independent insurance agent. These agents offer unbiased advice to help you understand your state’s specific laws. They offer best-case scenarios for your particular situation, and demystify how your benefits will be paid.

Are taxes normally taken out of workers' compensation payments?

The short answer to this question is no, taxes are not normally taken out of workers’ compensation payments. Under most normal circumstances, workers' compensation payments are tax-free income for disabled individuals who are unable to work on a temporary or permanent basis. 

When are taxes taken out of workers' compensation payments?

There are a few instances where workers' compensation payments are taxed:

  • You can be taxed when you collect Social Security Disability Insurance (SSDI) and/or Supplemental Security Income (SSI), and the amount that SSDI/SSI is reduced to fit a threshold becomes the taxable amount of workers’ comp benefits. For example, if this amount of SSDI/SSI is offset and reduced by $400, you will be responsible for paying tax on $400 of your workers’ comp payments
  • When you continue to work in a new position or in a limited capacity, workers’ comp payments will continue to be taxed as if they were a part of your regular income.
  • If an insurer is found to cause a considerable delay or is involved in egregious conduct in handling a workers' comp claim, any interest paid on benefits to an injured worker is considered taxable income.

Be aware that tax laws change often, which may result in higher or lower tax liability. For more information, consult an independent insurance agent to help you understand the complexities of the IRS and workers’ comp programs in your state. 

Are there ways to reduce my tax liability for workers' compensation payments?

As with most forms of income, there are always ways to prevent taxes from being taken out of what you receive with a sound financial strategy. A financial professional can recommend ways to reduce your tax liability, such as:

  • Creating a structured settlement
  • Reinvesting settlements into tax-deferred investments such as annuities
  • Avoiding large jumps in income that reach into higher tax brackets

By consulting an independent insurance agent, you can learn about what your potential tax liabilities are for workers' compensation payments, as well as ways to reduce them. If you are due to receive a large lump-sum settlement from workers’ comp after a work-related illness, you can create a joint-life annuity that supports your spouse and beneficiaries for life should you be unable to work or become deceased. 

Are there alternatives to workers' compensation payments for injured workers?

The truth is that workers’ compensation payments, while being generally untaxed, may not be enough to sustain a comfortable standard of living in the event of a workplace-related injury. Having insurance policies in place beforehand can mean the difference between having to work well into your retirement vs. enjoying your golden years with a regular stream of income and your needs met.

Independent insurance agents can offer a wide variety of insurance policies and investment vehicles that can safeguard your retirement and continued health care, including:

  • Annuities
  • Life insurance
  • Long-term care (LTC) insurance
  • Disability insurance
  • And more

If you’re looking to find out which types of insurance can offer you the lowest tax liability and most comprehensive protection, consider speaking with an independent insurance agent. These agents can help you understand potential tax liabilities and wise investment choices, as well as types of insurance to protect your family and finances. 

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