Once you secure workers’ compensation benefits for your serious injury, you may think the days of navigating the laws in Colorado are over. Yet once tax season rolls around, you might find yourself with questions about your settlement all over again. Finding out if you have to pay taxes on workers’ comp is an important task as a recipient.
Otherwise, you could accidentally snub the Internal Revenue Service (IRS) and get into significant legal trouble. A workers’ compensation lawyer can help you understand whether your settlement or verdict may be taxable based on your unique situation.
Most workers’ compensation awards are tax-free on a state and federal level. The government categorizes these types of awards with other nontaxable sources of income. Nontaxable sources of income can include welfare benefits, compensatory damages in a personal injury claim and no-fault disability insurance benefits. You will most likely not have to pay any taxes on your workers’ compensation settlement in Colorado. Payments received for medical costs, disability expenses and partial lost wages will all be tax-exempt. Survivors who receive wrongful death benefits through workers’ comp will also not have to pay taxes.
An important exception exists to the rule, however. If you receive Social Security Disability benefits in addition to workers’ compensation after a workplace accident. If the Social Security Administration (SSA) accepts your application for Social Security Disability Insurance or Supplemental Security Income on top of workers’ comp, the government may tax you for a certain amount of benefits. You may receive a diminished amount of Social Security benefits as a workers’ comp recipient. The difference your workers’ comp payments make (the workers’ compensation offset) would then be taxable.
Most injured workers receive a small difference between Social Security benefits and workers’ compensation. The taxable offset may only be a few hundred dollars in most cases. Higher awards, however, may require the recipient to pay more in taxes. If you decide to retire at the same time you are receiving workers’ compensation benefits, you may need a tax attorney to organize your finances in a way that will minimize what you will have to pay in taxes. The same is true if you receive a civil lawsuit award on top of workers’ compensation.
If a workplace accident causes a permanent disability, you may be eligible for Social Security Disability awards on top of workers’ comp. In these situations, the SSA will reduce your benefits to accommodate the additional money received through the workers’ compensation system. Calculate how much of an award you may end up paying taxes on by adding half of the SSA benefits you are receiving to your other income. Your benefits may face taxation at certain amounts.
The IRS may tax you on the full amount of benefits you receive through Social Security Disability. Even if the SSA reduces your actual award because of workers’ compensation, you may be taxed on the full amount. Keep in mind, most workers who receive workers’ comp in Colorado do not have to pay taxes on their awards. Only those who also receive Social Security may face taxation. A injury lawyer may be able to reduce the amount you will owe in taxes by structuring your settlement a certain way. Discuss your case with a qualified lawyer for personalized taxation information.