Justin S. Eppler
Do You Have to Claim Workers' Compensation on Your Taxes?
In the latest year for which it has published statistics, the Alaska Division of Workers’ Compensation says there were 17,694 reports of occupational injury and illness in the state in 2018. The vast majority – 79.8 percent were no-lost-time claims, totaling 14,121, the rest, or 3,554 cases, involved time lost from work.
When employees receive workers’ compensation benefits, whether for medical expenses or for wages lost from not being able to work, are those benefits taxable? Must they be reported to the IRS and the state?
The answer is mostly no, though, under certain circumstances, there may be some tax liability.
If you’re in or around Anchorage, Alaska, or in Fairbanks, Juneau, Wasilla, or Palmer, our team at the Law Office of Justin S. Eppler, LLC, can help you with all your workers’ compensation questions and needs, even with filing a claim or seeking a personal injury claim against a third party, which is sometimes possible even while receiving workers’ compensation.
Taxes and Workers’ Compensation
Workers’ compensation benefits are largely exempt from taxation at the state and federal levels. However, if you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), a portion of your benefits may be taxable.
Workers’ compensation falls within a non-taxable category similar to:
- Payments made from a public welfare fund
- Compensatory (but not punitive) damages for physical injury or illness
- Disability benefits under a “no-fault” auto insurance policy for loss of income or earning capacity resulting from your injuries
- Compensation for permanent loss or loss of use of a part or a function of your body, or for your permanent disfigurement
Social Security Disability & Workers’ Compensation
If you receive Social Security Disability at the same time as workers’ compensation, your Social Security payments may be reduced by the workers’ compensation portion. The part that is reduced will be treated as Social Security income and can become taxable. In most cases, this amount would be fairly negligible, however.
If You Also Receive a Personal Injury Settlement
In some cases, a workers’ compensation claim can also lead to a personal injury lawsuit. This generally is possible only if a third party is responsible for your injury. An example would be a piece of machinery that malfunctions at work due to manufacturing, design, or marketing defect (marketing defect means insufficient operating instructions and warnings) and causes you your injury.
If you receive a settlement or court award as compensation for your injuries and lost wages, it is generally not taxable at the federal level. However, if you claim, or previously claimed, medical expenses for the injury as deductions on your tax return, those itemized deductions must be treated as income when you report your tax-free injury compensation.
If You Retire or Tap Retirement Funds While on Workers’ Compensation
Workers’ compensation does not fully cover lost wages. Using formulas generally favorable to the workers’ compensation insurance providers, payments for lost wages in Alaska are capped at 80 percent of your “spendable weekly wage.” Spendable weekly wage is your take-home pay after deductions for taxes, Social Security, and Medicare. For instance, if you normally receive a weekly paycheck of $800, on workers’ compensation you would be eligible to receive $640.
To make up the difference and maintain balance in your living standards, you may be tempted to withdraw funds from your 401(k) or other retirement accounts. Remember, however, that what you withdraw becomes fully taxable.
Likewise, you may be approaching the age – or already there – when you can retire and start receiving your funds, whether from a private retirement account or Social Security (as opposed to Social Security Disability), or both. If you do retire, your retirement funds will become fully taxable, though your workers’ compensation would likely still be exempt. However, unless you are totally disabled, your workers’ compensation provider can terminate your wage loss payments while continuing your medical expense reimbursement.
Law Office of Justin S. Eppler: Experience You Can Trust
If you’re injured at work or fall ill because of conditions on the job, you are entitled to workers’ compensation, which is a program mandated for all employers in Alaska. Your employer must either contract with an insurance provider or qualify to self-insure. Either way, the system is designed to be “no-fault.” Neither employer nor employee can be held liable in most cases, the exception being (as noted above) if a third party is involved.
Whatever your workers’ compensation questions or needs – perhaps you face an adverse decision or denial – you can rely on the Law Office of Justin S. Eppler, LLC. We have helped countless others like you in Anchorage, Fairbanks, Juneau, Wasilla, and Palmer. Contact us immediately for a consultation when issues arise or appeals need to be filed.