When you get injured on the job, you have a lot on your mind. You may worry about providing for your family while you are injured. You may have mounting medical bills that need to be paid. You might also feel worried about your recovery and whether you can ever return to your previous level of health.
One thing you may not think about once your workers’ compensation benefits have been approved is whether you have to pay taxes on them. Many people assume workers’ comp functions just like regular wages, and so, of course, they would be taxable. But workers’ comp is different from the money you earn through your employment each week.
Can My Workers’ Compensation Benefits Be Taxed?
No, your workers’ compensation benefits or settlement cannot be taxed. The government does not take a portion of your weekly benefits or a lump sum settlement, whichever you may have received to settle your workers’ compensation case. You will not pay taxes at the federal, state or local level on your workers’ comp money. This means you should not receive a W-2 or 1099 form for this money.
If you also receive Social Security disability payments, you do pay taxes on those. The IRS lays out different rules governing workers’ comp. IRS Publication 907 says these benefits are not eligible for taxation.
For those who use a tax preparation service to file their taxes, discuss what is and is not taxable income on your filing. Make sure they are abreast of current regulations and understand that you should not be taxed on your workers’ compensation income.
Why Did I Receive a W-2 or 1099 From the Insurance Company?
One reason confusion can arise over taxes in workers’ compensation cases is that insurance companies sometimes send out a 1099 or W-2 based on the money you collected from your benefits or a lump sum settlement. When you receive this notification in the mail during the early part of the year, you may assume this means you must pay taxes on this income.
The insurance company made a mistake. They should not have sent you the 1099 or W-2. Get in touch with your lawyer right away if you receive one of these forms so your attorney can contact the insurance company and get the matter resolved.
Talk to an Attorney About Deductions to Your Workers’ Comp Settlement
Even under the best of circumstances, many people feel overwhelmed by tax season and keeping what they owe straight. Adding in another wrinkle, like whether to pay taxes on workers’ comp benefits, can make you feel overwhelmed.
Reach out to the lawyers at Frommer D’Amico for assistance with your case. We only take workers’ compensation cases and we never represent employers — only workers. Plus, we charge lower fees. We can even come to your location for our meetings. Contact us today to set up an initial consultation. Get in touch via phone at 717-400-1000 or reach out online.