When you are involved in any legal proceedings where you stand to receive a payment, it is important to understand the tax implications of that money. With Workers’ Comp, you should understand how payments and settlements will affect your annual taxes.
Under both Pennsylvania law and federal law, Workers’ Comp payments are tax-exempt. This means that, while you are receiving benefits, you pay no income tax on those benefits. However, you will still pay taxes on other income you make. There is also an exception: Workers’ Comp benefits become taxable if you are also receiving Social Security.
For help with a claim, call the Certified Pennsylvania Workers’ Compensation Lawyers at Cardamone Law at (267) 651-7945.
Do I Pay Pennsylvania Income Taxes on Workers’ Comp?
Understanding both the state and federal rules is important:
General Rule
Pennsylvania law does not tax Workers’ Comp benefits. Because these benefits are paid under the Workers’ Comp Act, they are not taxed at all.
Turning Over Benefits to Employer
However, if you receive benefits under other programs, they might be taxed. Some agreements and other benefits programs – such as wages paid under the Heart and Lung Act to firefighters and other first responders – require you to sign your Workers’ Comp benefits over to your employer. In exchange, you get your normal wage.
Because you are getting your normal wage instead of Workers’ Comp payments, you do still pay income taxes.
Combination with Social Security
Additionally, Pennsylvania income taxes are paid on Workers’ Comp benefits if you are simultaneously getting Social Security benefits for a disability that keeps you from working.
Do I Pay Federal Income Tax on Workers’ Comp?
Federal income tax rules under I.R.C. § 104(a)(1) also exclude Workers’ Comp benefits paid under a Workers’ Compensation law. That should cover all benefits you receive for your injury. This may have similar tax implications much like those discussed above if you sign over your benefits to your employer in exchange for full wages, since you are receiving wages and not Workers’ Comp benefits.
Settlements vs. Benefit Payments
Whether you receive a settlement or ongoing Workers’ Comp benefits doesn’t make a difference for tax purposes. In either case, you still do not pay taxes on Workers’ Comp benefits paid under a Workers’ Comp act.
Injury Lawsuits vs. Workers’ Comp Benefits
When you are injured in a work-related accident, you cannot usually sue your employer. However, you might be able to sue other outside parties, such as these:
- Manufacturers of dangerous materials, tools, machinery, or vehicles
- Manufacturers of defective safety gear
- Drivers
- Customers/clients
- Vendors/suppliers.
Differences from Workers’ Comp Benefits
In a lawsuit against these people, the money you stand to receive is potentially higher than your Workers’ Comp benefits, but overlaps to some extent. For example, Workers’ Comp typically pays 2/3 of lost wages, while a lawsuit can pay 100% of these lost wages.
You usually have to pay back the overlapping damages to the insurance carrier, and you might pay taxes in that transaction.
A lawsuit can also pay pain and suffering damages to reimburse the harm the injury caused you directly and punitive damages to punish an especially dangerous actor. These damages are not available in Workers’ Comp.
Taxation Rules for Lawsuits
The money from a lawsuit may be taxable, even though Workers’ Comp payments usually aren’t:
- Money paid on account of physical injury is not taxable (including medical bills, lost wages, and pain and suffering).
- Money paid on account of a mental-only injury is taxable, but mental anguish damages stemming from your physical injury are not.
- Punitive damages are taxable.
- Interest on your injury damages is taxable.
Other Income Considerations
While your Workers’ Comp benefits are not taxed, they may still have implications for other benefits programs you can apply to. Things like SNAP benefits, Medicaid, and ACA health insurance discounts may apply based on your disability and income level.
It is possible that you might still want to consider structuring your Workers’ Comp settlement in such a way that you can keep these additional benefits. This might mean receiving a structured settlement or annuity rather than a lump-sum payment to keep you qualified for these other programs.
FAQs for Taxing Workers’ Comp Benefits
Do I Pay Income Tax on Workers’ Comp?
Both Pennsylvania law and federal law ignore Workers’ Comp benefits for income tax purposes. However, this only applies if you are receiving the benefits directly. Other setups might actually ruin this exception and cause you to pay taxes.
Do I Pay Social Security and Medicaid Taxes on Workers’ Comp?
Taxes to cover Social Security and Medicaid also ignore Workers’ Comp settlements.
Does it Matter if I Get Ongoing Benefits, a Lump Sum, or a Structured Settlement?
As long as the benefits are Workers’ Comp benefits, you do not pay taxes on them unless you meet one of these rare exceptions discussed here. It doesn’t make a difference for taxes if the benefits are ongoing, a lump sum, or a structured settlement.
What if I Turn Over My Workers’ Comp to My Employer?
Some programs and agreements require you to turn your benefits over to your employer instead of taking them directly. If you do that, your employer usually pays you full wages. Because you are receiving wages and not Workers’ Comp benefits, you usually pay taxes on these as though they were normal income.
Either way, this still gives you more money in your pocket since full wages minus taxes will usually be greater than 2/3 of wages from your Workers’ Comp benefits.
Are Lawsuits for Work Injuries Taxable?
If you can file a lawsuit for a work injury, all payments paid because of a physical injury are not taxed. This usually covers medical bills, lost wages, and pain and suffering.
However, anything paid for a mental-only injury might be taxed. Moreover, punitive damages, interest, and certain other payments that are not tied to the physical injury might be taxable.
Do I Pay Taxes on Workers’ Comp if I Also Get Social Security?
When you get both Workers’ Comp and Social Security for a disability, you will typically face an “offset.” This prevents you from getting full benefits from both programs and reduces the payments. Some portions of this offset might be taxable, depending on your situation.
Call Our Workers’ Comp Lawyers in Pennsylvania Today
For a free case evaluation, call Cardamone Law’s Philadelphia Workers’ Comp lawyers at (267) 651-7945.
